International rating agency Moody’s has claimed that the attempt made in Sri Lanka’s budget 2021 to resurrect its collapsing economy by massive borrowings targeting expedited economic growth cannot be a successful one.
Budget deficits are ranging from 7.9% of GDP in 2020 and 9% of GDP in 2021 respectively.
From attracting investments to managing the deficit, there is possibly even more emphasis on oversight and achieving targets in this Budget than its previous avatars.
This is mostly because there is much more riding on this Budget given Sri Lanka’s growth challenges, COVID-19, debt sustainability and reputation of routinely missing targets.
In its latest report, Moody’s said they were particularly concerned that a 28% increase in revenue was too ambitious and growth was unlikely to rebound by the 5.5% outlined in the Budget given persistently low domestic and international demand.
The dilemma between delivering on ambitious fiscal consolidation targets and supporting economic recovery will continue to weigh on Sri Lanka’s credit profile ahead of significant and recurring external debt-servicing requirements through 2025 with Budget deficits to remain 8% or above beyond 2023.
The government has to find USD 4.1 billion each annually to service foreign debts and USD 21.6 billion till the year 2025 at a time the country has lost a part of its foreign remittances amounting to USD 7 billion and another USD 4 billion from the drop in exports around USD 5 billion loss from the collapse of tourism industry.
The government’s drive to support and encourage domestic production to reach self-sufficiency in identified goods is likely to play a crucial role in Sri Lanka’s economic transformation.
However, the maintenance of quality standards of domestically-produced goods and ensuring availability at a reasonable price are vital to derive intended benefits in the medium to long term.
This is imperative to boosting Sri Lanka’s competitiveness because import substitution will not be successful unless products move up the value chain and can also expand the country’s limited basket of exports.
Adequate investment in innovation and research and development (R&D), and the promotion of export-oriented Foreign Direct Investment (FDI) are needed to improve efficiency and enhance productivity, particularly in the SME sector.
If Sri Lanka is to achieve the high growth predicted in 2021, it has to have improved access to international markets, so trade negotiations with existing and new partner economies must continue.
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