Sri Lanka confident of not defaulting on its debt, says Finance Minister

(Reuters) – Sri Lanka is confident of not defaulting on its debt repayments and will work on gradually improving the quality of its foreign exchange reserves, finance minister Basil Rajapaksa said on Saturday, a day after presenting the 2022 annual budget.

The government will reduce its budget deficit to around 8.8% of gross domestic product in 2022, the finance minister had said in his speech on Friday. The deficit target for 2021 was revised to 11.1%.

“Sri Lanka has never defaulted in its history and that record will be maintained,” Rajapaksa said.

“Even part of our reserves are borrowed but we will improve the quality of reserves gradually from next year till 2024. By 2024, we are confident we will be able increase reserves and put debt on a sustainable footing,” he added.

Debt repayment is one of the key challenges facing Sri Lanka with foreign exchange reserves having dropped to $2.27 billion as of end October.

Rajapaksa said remittances and tourism, which are the top two sources of dollar inflows, have both been affected by the COVID-19 pandemic and it has been tougher to attract investors.

“But we want to reduce borrowings. I guarantee that the $1.54 billion up to July 2022 will be repaid,” he added.

Analysts are unsure if the announcements in the budget are enough to instil confidence in investors, ratings agencies and market participants.

“Overall, the budget is unlikely to help the economic situation significantly and does not give a strong indication of how it expects to meet its debt obligations going forward or how it expects to address the plummeting reserves,” said Trisha Peries, head of economic research at Frontier Research.

“There is no clear indication of a move towards the IMF, as they continue to look for bilateral and multilateral support echoing the Central Bank of Sri Lanka roadmap,” she added.