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Moody's urges tax efficiency to outweigh Sri Lanka's heavy debt burden

Moody's Investors Service urged the Sri Lankan government to improve its tax efficiency in order to increase the tax revenue/ GDP ratio, highlighting the country's ongong credit challenges of high general government debt, very low debt affordability and large borrowing requirements. 

In a statement published on Friday, Moody's said: 

Despite ongoing fiscal consolidation, Sri Lanka's credit profile will remain constrained by its large debt burden and very low debt affordability, combined with contingent liability risks from state-owned enterprises. Moody's expects general government debt to decline only gradually to around 78% of GDP in 2018, from 79.3% in 2016, significantly higher than the median of 53% for B-rated sovereigns.

Progress on reducing external vulnerability has been slower. External and foreign currency debt account for about 43% of total government debt, giving rise to significant exposure to external financing conditions. In particular, large volumes of external government debt maturing in 2019-22 will test government liquidity and external vulnerability. Further measures to build foreign-exchange reserves would help establish buffers against external pressure, in particular ahead of 2019.

Signs that planned fiscal consolidation measures are less effective than Moody's currently expects or that the authorities' commitment towards such steps has diminished would weigh on Sri Lanka's rating, particularly if foreign-exchange reserves remain low while refinancing of market debt is challenging.