Impact of remittance inflows likely to exacerbate Sri Lanka’s external financing needs

by Sanath Nanayakkare

Remittance inflows to Sri Lanka would deteriorate in the coming quarters exacerbating the country’s existing challenges, Fitch Ratings Frontier Markets Quarterly Report (3Q20) said recently.

“We expect remittance inflows to deteriorate in the coming quarters, even though recent levels have been robust due to temporary factors, such as migrant workers transferring savings in preparation for their return home”.

“However, a forecast 12% decline in remittances in 2H20 is likely to widen current account deficits contributing to higher external financing needs. For Pakistan and Sri Lanka, whose remittance flows represent around 8% of GDP and external finances are fragile, this shock could exacerbate existing challenges, including high and rising debt levels”. It said.

“Both Pakistan and Sri Lanka have general government debt-to-GDP levels above the peer median. We believe Pakistan will start to lower its public debt-to-GDP ratio in 2022 under its IMF-supported programme. Mongolia will also cut public debt as a share of GDP by 2022, with economic growth and government revenues underpinned by rising mineral exports. However, we project a sustained increase for Sri Lanka throughout 2020-2022, and rising external financing strains are evident in a widening of its international bond spreads in recent weeks”.

“Rapidly-rising debt levels across all regions and generally shallow domestic financial markets mean sovereigns with greater external funding flexibility are at an advantage. In this context, for many, access to international capital markets has returned. There is substantial multilateral financing available and some have sovereign wealth funds (Angola, Azerbaijan) and/or debt service relief, such as the G20 Debt Service Suspension Initiative (DSSI), to support debt sustainability and ratings”, Fitch Ratings report said.