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The statement said although this will lower Sri Lanka’s high fiscal deficits and debt, it will likely require a widening of the small tax base and revisiting the government’s expenditure commitments.
Sri Lanka is at the higher end of external vulnerability of B-1 rated peers, such as Jordan, Kenya and Vietnam, forecasted for 2016, according to Moody’s in its report.
“Moreover, such an agreement will likely restore investor confidence in Sri Lanka’s policy framework, and ultimately support more stable external inflows,” Moody’s said.
An agreement with the IMF and financing from the ADB will provide some liquidity and thereby ease immediate financing pressures.
“At the same time, the financing will likely be at more favorable terms than market borrowing, alleviating debt servicing cost pressures to some extent,” Moody’s said.
Last Tuesday, Sri Lanka gained more than 2 billion US dollars in infrastructure and education financing from the Asian Development Bank.
The ADB’s commitment followed Sri Lanka’s public request for support from the IMF by just weeks.
“The sovereign’s recourse to multilateral financing underscores its large external financing needs and the limited scope for market financing to meets those needs, revealing Sri Lanka’s credit-negative vulnerability to external event risk.”
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