Sri Lanka policy changes to bolster external position: Fitch

Feb 29, 2012 (LBO) – Sri Lanka’s external finances are under pressure but recent policy changes could bolster the balance of payments even if they hurt growth, Fitch Ratings said. Analysts have pointed out that Sri Lanka is vulnerable to oil prices because the state manipulates energy prices and there is no mechanism to quickly pass through external costs to extinguish domestic demand (curb non-oil consumption and imports by an equal amount).

An automatic price formula for petroleum, and periodic power price changes, would take the oil risk out of the economy. Sri Lanka raised both oil and power prices in February.

Sri Lanka’s current pressure has emerged largely from internal credit growth, and so-called ‘hot money’ has so far remained calm.

“Retaining investor confidence in the policy framework will be especially important to ward off the risk of capital flight,” Fitch said.

“Thus, adhering to policies aimed at delivering a sustainable balance of payments, even at the cost of slightly slower growth, would support the current ratings.

“Conversely, policy slippage, leading to further current account deficit widening and risking loss of investor confidence