Fitch revises Sri Lanka view downward

Fitch Ratings said it revised the outlook on Sri Lanka’s long-term foreign-currency issuer default rating to negative from stable and affirmed the IDR at B.

The outlook revision to negative from stable reflects rising risks to debt sustainability from a significant shift in fiscal policy and the potential for roll-back of fiscal and economic reforms in the aftermath of November’s presidential elections. “We believe the departure from the previous revenue-based fiscal consolidation path has created policy uncertainty and increased external financing risk for the sovereign, particularly given the large external debt repayments due in 2020 and beyond,” said Fitch in a press release.

Recently appointed President Gotabaya Rajapaksa announced tax cuts soon after taking office, including a revision of the value-added tax rate to 8% from 15% (the rate applicable to financial services has been kept at 15%), an increase in the liable limit for VAT registration to LKR 300 million, scrapping of the nation building tax, lowering the income tax rate for the highest income bracket to 18%, from 24% and changing the withholding tax regime among others.

Fitch’s preliminary estimates show the VAT rate change and the scrapping of the nation building tax could lower revenue by as much as 2% of GDP in the absence of off-setting measures. VAT accounted for 24% of government revenue in 2018. Despite offsetting measures, the agency expects the deficit to widen by about 1.5% of GDP relative to Fitch’s previous forecasts.

© 2015 Prospect News.
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