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Sri Lanka downgraded again

18 Dec 2021

  • Fitch downgrade rather hasty and reckless: CBSL
The Central Bank of Sri Lanka (CBSL) yesterday (18) responded to Fitch Ratings downgrading Sri Lanka’s Long-Term borrowings to “CC” from “CCC” as “a rather hasty and reckless move”. Issuing a press release, the CBSL claimed that by doing so, Fitch had demonstrated “its failure to recognise the positive developments taking place in Sri Lanka, in an environment in which the entire world is grappling with multiple waves of the Covid-19 pandemic,” drawing parallels to what the CBSL said was a similar “unwarranted action” by Moody’s Investors Service, days before the 2022 Budget was tabled in the parliament. Fitch Ratings, in its statement regarding the downgrading, highlighted the precarious status of Sri Lanka’s foreign reserves: “The downgrade reflects our view of an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in foreign-exchange reserves set against high external debt payments and limited financing inflows. The severity of financial stress is illustrated by elevated government-bond yields and downward pressure on the currency.” The ratings agency stated that Sri Lanka’s foreign exchange reserves had dropped much faster than they expected in their last review. “Owing to a combination of a higher import bill and foreign-currency intervention by the Central Bank of Sri Lanka. Foreign exchange reserves have declined by about $ 2 billion since August, falling to $ 1.6 billion at end-November, equivalent to less than one month of current external payments,” Fitch explained. The CBSL, in reply, blamed the rating agency for the early action, stating that it may hurt investor decisions and argued that the Government has not delayed any debt payments up-to-date. “The fact that Fitch Ratings decided to downgrade Sri Lanka without waiting until the first test date of 31 December 2021 shows nothing but recklessness, which could only hurt investors if decisions are made based on this downgrade. It must also be noted that the Government has given a clear assurance that Sri Lanka will honour all debt obligations in the period ahead, and Sri Lanka has not delayed a single payment even under severe stresses that were caused by the Covid-19 pandemic over the past two years,” the CBSL said. Former Central Bank Deputy Governor Dr. W.A. Wijewardena responded to the Fitch Ratings downgrade, criticising the CBSL’s decision not to seek IMF assistance. He tweeted saying: “SL long-term sovereign borrowing downgraded from CCC to CC by @FitchRatings in view of drastic fall of reserves leading to possible default on Jan21; as we pointed out goals of six-month Road Map not realised; @CBSL reluctance to seek @IMFNews main culprit (sic).”


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