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Sri Lanka's Sovereign Rating May Be Raised, Standard & Poor's Benard Says

Sri Lanka’s sovereign rating, which is on par with Kenya and Ukraine, may be raised as funds from a $2.5 billion International Monetary Fund loan improved the “external liquidity situation,” Standard & Poor’s said.

The South Asian country, which is rebuilding its economy after ending a 26-year civil war, turned to the IMF last year after foreign-exchange reserves dropped to an eight-year low. S&P in October raised the island-nation’s credit outlook to positive from stable and affirmed the long-term foreign currency debt rating at B, five levels below investment grade.

“The balance of payments crisis is behind us and the reserve position is stable,” Agost Benard, S&P’s Singapore- based associate director, said in a telephone interview today. “The positive outlook means that the most likely outcome in the next move is for the rating going up.”

Benard didn’t elaborate when S&P would next make an announcement on the South Asian country’s rating.

Sri Lanka said this week that foreign-exchange reserves had risen to $5.5 billion, or equivalent to about 6 months of imports. The Washington-based lender on June 28 released $408 million to Sri Lanka and agreed to a one-year extension as the country pledged to trim its budget deficit.

President Mahinda Rajapaksa’s government on June 29 unveiled plans to slash its deficit by the most in eight years and pledged to cut taxes to spur economic growth.

Tax Rates

Sri Lanka will narrow the budget shortfall to 8 percent of gross domestic product in 2010 from 9.9 percent in the previous year, Deputy Finance Minister Sarath Amunugama said in his budget speech on June 29. The proposed reduction is the biggest since 2002 after the government last year failed to meet the 7 percent target under the IMF program.

Sri Lanka is overhauling its tax rates based on the recommendations of a panel set up by Rajapaksa that will submit its final report in August, said Amunugama, who didn’t unveil any tax changes in the budget.

“Fiscal consolidation doesn’t yet seem to be a priority, with deficit targets being missed,” Benard said. “There’s still a question-mark on what sort of revenue measures will be implemented to achieve targets.”

Central Bank of Sri Lanka Assistant Governor C.J.P. Siriwardena said yesterday the island nation plans to sell dollar-denominated bonds by the end of this year in its third overseas offering.

Sri Lanka is formulating a strategy to have its rating upgraded to investment level in the next four years, the central bank said in a June 9 statement.

“The new budget and continued IMF program are positives,” Benard said. “Still, to have effect on the rating, executing the program is key.”

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.

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