If Sri Lanka loses the support of trading partners such as the U.S., Japan and the E.U., its already vulnerable economy is set to suffer.
The Ministry of Finance on Friday announced a slew of initiatives meant to revive the economy, including lower petrol prices and reduced levies on certain agricultural commodities. The crowd-pleasing measures are likely to boost Rajapaksa’s popularity — the newly-appointed PM is a known populist — ahead of the expected parliamentary vote.
But the fiscal relief package could also strain state finances at a time when revenues are already weak, according to economists. A day before Friday’s news, Sri Lanka’s central bank warned that Colombo may miss its budget deficit target for 2018 — 4.8 percent of gross domestic product — amid lower-than-expected income collection from import duties.
That, in turn, could impact Colombo’s three-year $1.5 billion loan program with the International Monetary Fund. Under the agreement, the island nation must implement a range of reforms that include fiscal consolidation, revenue mobilization and structural reforms on state enterprise.
Given the risk of fiscal slippage under Rajapaksa, the final tranches of IMF funds may be called into question, said Kenneth Akintewe, head of Asian sovereign debt at Aberdeen Standard Investments.
Colombo also faces significant rollover risks in terms of national debt.
“Some of the biggest maturities are coming up next year so this [political crisis] is extremely bad timing for Sri Lanka,” Akintewe added.