HONG KONG • Sri Lanka faces a likely collapse of tourism following the Easter Sunday bomb attacks on churches and hotels, which would deal a severe blow to the island's economy and financial markets, and potentially force it to seek further IMF assistance.
The International Monetary Fund (IMF) extended last month a US$1.5 billion (S$2.04 billion) loan for an extra year into 2020, a key step in keeping foreign investors involved in a top-performing frontier debt market this year.
But with growth, and therefore state revenues, now likely to slow significantly, the budget targets agreed with the IMF may have to be reviewed, and the government is expected to resist pressure for any spending cuts before elections expected later this year.
There is even a possibility that more IMF money may be needed if foreign investment falls, adding to the hard currency gap left by plunging tourism receipts.
IMF's Sri Lanka mission chief Manuela Goretti said on Tuesday that initial financial market pressures on Sri Lanka appeared contained after the horrific attacks.
"Decisive policy and security measures by the authorities will be important, in particular for tourism, which accounts for 5 per cent of GDP, to build on the strong performance of recent years," she said.
The Sri Lankan stock index dived 2.6 per cent on Tuesday in its first day of trading after the attacks that left more than 300 people dead, while the heavily managed rupee held steady. Tourism is Sri Lanka's third-largest and fastest-growing source of foreign currency, after remittances and garment exports, accounting for almost US$4.4 billion of gross domestic product last year.
A fall in tourism receipts is bound to weaken the rupee over time.
The central bank, whose coffers are too light to defend the currency through interventions, is likely to have to raise interest rates.
This would choke lending, hurting consumers and the investment plans of local businesses, while also making it more costly for the government to seek funding from foreign investors via bond markets.
Sri Lanka's external position was already precarious. To help fund a record US$5.9 billion in foreign loans this year, the country successfully sold US$2.4 billion in five-year and 10-year US dollar bonds last month, but that was right after the IMF extension and amid bets of looser monetary policy.
In January, Sri Lanka used its reserves to repay debt worth US$1 billion. It had about US$5 billion left in February, the least since April 2017, and only enough to cover two months of imports and about two-thirds of its short-term external debt. Colombo also needs to finance a current account deficit of about 3 per cent of GDP.
Prime Minister Ranil Wickremesinghe is already facing heavy criticism domestically for higher taxes, and tight monetary and fiscal policies that have crimped growth to a 17-year low.
He has set an ambitious fiscal deficit goal of 4.4 per cent of GDP, compared with 5.3 per cent last year. But he also boosted spending on state employees, pensioners and the armed forces, and promised more funds for rural infrastructure, leading economists to doubt the targets.
A presidential vote is expected later this year, followed by a general election next year.