Fitch downgraded forex-strapped Sri Lanka by one notch to “CC” citing mounting fears of a sovereign default. Then on 24 December 2021 Fitch downgraded Bank of Ceylon’s (BOC) long-term foreign currency Issuer Default Rating (IDR) to “CC”, from “CCC”. Sri Lanka is due to repay close to $ 1 billion worth of (total) debt in January and a total of over $ 7.3 billion for 2022.
Fitch would possibly have panicked, according to analysts, given that Sri Lanka’s economy has contracted by 1.5% year-on-year (YoY) in the third quarter of 2021, following a 12.3% expansion in the previous period, according to the data of the Census and Statistics Department. The foreign exchange (forex) crisis has so far wrecked Sri Lanka’s recovery from the coronavirus pandemic. Fitch justified their view, saying: “The downgrade reflected its view of an increased probability of a default event in the coming months as Sri Lanka’s foreign reserves slumped to $ 1.58 billion at the end of November.”
The Central Bank of Sri Lanka (CBSL) was quick to respond by saying it was a reckless action by the rating agency despite being informed of the imminent inflows as outlined in the Six-Month Road Map and the progress of inflows announced during the week. All this is well and good. But we have a serious forex crisis that needs resolving. Unfortunately for Sri Lanka, credit rating institutions go by global standards and their conclusions are based on hard research and data published in various public domains. Moreover, they do several tests on the capacity of the borrower to honour borrowings and obligations and also the probability of realising projected incomes.
Unlike Argentina, Ecuador, or Lebanon, which have defaulted, Sri Lanka has so far never defaulted, so we still have some bargaining power left with the International Monetary Fund (IMF). Why we did not go to the IMF with our heads held high at the onset of the pandemic, like many others did, remains a mystery to many people.
The country belongs to the 22 million people who inhabit this country. Not only to the set of bureaucrats or politicians who hold executive authority in trust for a term to take decisions on behalf of the 22 million. A chief executive officer (CEO) of a fund that invests in Sri Lankan bonds noted that their HQ internal rating guidelines does not allow them to hold investments in CCC-rated debt – and now even worse, CC-rated debt. So was the pandemic the “only” cause of this forex crisis? According to several economists, it is certainly not the case.
Default concerns
Fitch, in a statement, said: “The downgrade reflects our view of an increased probability of a default event in the coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in forex reserves set against high external debt payments and limited forex inflows. The severity of financial stress is illustrated by elevated government bond yields and downward pressure on the currency.”
The statement further said: “We believe it will be difficult for the Government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources. Obligations include two international sovereign bonds of $ 500 million due in January 2022 and $ 1 billion due in July 2022. The Government also faces foreign currency debt service payments, including principal and interest, of $ 6.9 billion in 2022, equivalent to nearly 430% of official gross international reserves as of November 2021.”
However, Finance Minister Basil Rajapaksa has told Parliament that the country will not default on its debt repayments in 2022 despite being faced with a severe foreign reserves crisis.
Way forward
Recently, newspapers reported the Cabinet is seriously contemplating IMF support. An IMF programme would certainly help unlock concessionary multilateral and bilateral financing, but the IMF would want serious restructuring to bring about future debt sustainability. On the other hand, if the Government is confident of the forex flows, they would not need to engage in any formal debt renegotiation process, which technically constitutes a default.
Given the challenges ahead for Sri Lanka, whoever advised the Government to refrain from seeking IMF support in early 2020 needs his head examined and must be held accountable by Parliament. Anyone who can understand basic math would have known when Sri Lanka lost its tourism-related income in 2020 what it would then do to the forex reserves of the country.
In fact, the CBSL had in September 2021 anticipated to have $ 3.5 billion in reserves by the year end; however, Sri Lanka’s gross official reserves fell to $ 1,587 million in December, about one month of imports. Then, CBSL Governor Ajith Nivard Cabraal, a professional with a decade of experience in the CBSL, said the CBSL would draw down on a $ 1.5 billion equivalent swap with the People’s Bank of China. Sri Lanka thus ended the year at $ 3.5 billion.
The China swap is denominated in renminbi (RMB) and can be used for payments to China. So whilst this is a temporary fix to ride over 2021, the Government should also look to expedite the paperwork relating to all grants and concessionary funds that are stuck due to bureaucratic delays and fast-track those potential Indian credit lines in the pipeline.
Given the serious economic situation and the severity of the challenges faced by the daily wage earners in the country, the solution to our forex crisis is to grow our exports and attract foreign direct investment (FDI), and put a full stop to foreign borrowings that fund unproductive projects and non-essential imports.
(The writer is the Chairman of the International Chamber of Commerce Sri Lanka)
…………………………………..
The views and opinions expressed in this article are those of the author, and do not necessarily reflect those of this publication.The forex crisis needs resolving in 2022, with or without IMF
17 Jan 2022
The forex crisis needs resolving in 2022, with or without IMF
17 Jan 2022
Fitch downgraded forex-strapped Sri Lanka by one notch to “CC” citing mounting fears of a sovereign default. Then on 24 December 2021 Fitch downgraded Bank of Ceylon’s (BOC) long-term foreign currency Issuer Default Rating (IDR) to “CC”, from “CCC”. Sri Lanka is due to repay close to $ 1 billion worth of (total) debt in January and a total of over $ 7.3 billion for 2022.
Fitch would possibly have panicked, according to analysts, given that Sri Lanka’s economy has contracted by 1.5% year-on-year (YoY) in the third quarter of 2021, following a 12.3% expansion in the previous period, according to the data of the Census and Statistics Department. The foreign exchange (forex) crisis has so far wrecked Sri Lanka’s recovery from the coronavirus pandemic. Fitch justified their view, saying: “The downgrade reflected its view of an increased probability of a default event in the coming months as Sri Lanka’s foreign reserves slumped to $ 1.58 billion at the end of November.”
The Central Bank of Sri Lanka (CBSL) was quick to respond by saying it was a reckless action by the rating agency despite being informed of the imminent inflows as outlined in the Six-Month Road Map and the progress of inflows announced during the week. All this is well and good. But we have a serious forex crisis that needs resolving. Unfortunately for Sri Lanka, credit rating institutions go by global standards and their conclusions are based on hard research and data published in various public domains. Moreover, they do several tests on the capacity of the borrower to honour borrowings and obligations and also the probability of realising projected incomes.
Unlike Argentina, Ecuador, or Lebanon, which have defaulted, Sri Lanka has so far never defaulted, so we still have some bargaining power left with the International Monetary Fund (IMF). Why we did not go to the IMF with our heads held high at the onset of the pandemic, like many others did, remains a mystery to many people.
The country belongs to the 22 million people who inhabit this country. Not only to the set of bureaucrats or politicians who hold executive authority in trust for a term to take decisions on behalf of the 22 million. A chief executive officer (CEO) of a fund that invests in Sri Lankan bonds noted that their HQ internal rating guidelines does not allow them to hold investments in CCC-rated debt – and now even worse, CC-rated debt. So was the pandemic the “only” cause of this forex crisis? According to several economists, it is certainly not the case.
Default concerns
Fitch, in a statement, said: “The downgrade reflects our view of an increased probability of a default event in the coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in forex reserves set against high external debt payments and limited forex inflows. The severity of financial stress is illustrated by elevated government bond yields and downward pressure on the currency.”
The statement further said: “We believe it will be difficult for the Government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources. Obligations include two international sovereign bonds of $ 500 million due in January 2022 and $ 1 billion due in July 2022. The Government also faces foreign currency debt service payments, including principal and interest, of $ 6.9 billion in 2022, equivalent to nearly 430% of official gross international reserves as of November 2021.”
However, Finance Minister Basil Rajapaksa has told Parliament that the country will not default on its debt repayments in 2022 despite being faced with a severe foreign reserves crisis.
Way forward
Recently, newspapers reported the Cabinet is seriously contemplating IMF support. An IMF programme would certainly help unlock concessionary multilateral and bilateral financing, but the IMF would want serious restructuring to bring about future debt sustainability. On the other hand, if the Government is confident of the forex flows, they would not need to engage in any formal debt renegotiation process, which technically constitutes a default.
Given the challenges ahead for Sri Lanka, whoever advised the Government to refrain from seeking IMF support in early 2020 needs his head examined and must be held accountable by Parliament. Anyone who can understand basic math would have known when Sri Lanka lost its tourism-related income in 2020 what it would then do to the forex reserves of the country.
In fact, the CBSL had in September 2021 anticipated to have $ 3.5 billion in reserves by the year end; however, Sri Lanka’s gross official reserves fell to $ 1,587 million in December, about one month of imports. Then, CBSL Governor Ajith Nivard Cabraal, a professional with a decade of experience in the CBSL, said the CBSL would draw down on a $ 1.5 billion equivalent swap with the People’s Bank of China. Sri Lanka thus ended the year at $ 3.5 billion.
The China swap is denominated in renminbi (RMB) and can be used for payments to China. So whilst this is a temporary fix to ride over 2021, the Government should also look to expedite the paperwork relating to all grants and concessionary funds that are stuck due to bureaucratic delays and fast-track those potential Indian credit lines in the pipeline.
Given the serious economic situation and the severity of the challenges faced by the daily wage earners in the country, the solution to our forex crisis is to grow our exports and attract foreign direct investment (FDI), and put a full stop to foreign borrowings that fund unproductive projects and non-essential imports.
(The writer is the Chairman of the International Chamber of Commerce Sri Lanka)
…………………………………..
The views and opinions expressed in this article are those of the author, and do not necessarily reflect those of this publication.Kapruka
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Discover Kapruka, the leading online shopping platform in Sri Lanka, where you can conveniently send Gifts and Flowers to your loved ones for any event. Explore a wide range of popular Shopping Categories on Kapruka, including Toys, Groceries, Electronics, Birthday Cakes, Fruits, Chocolates, Automobile, Mother and Baby Products, Clothing, and Fashion. Additionally, Kapruka offers unique online services like Money Remittance, Astrology, Medicine Delivery, and access to over 700 Top Brands. Also If you’re interested in selling with Kapruka, Partner Central by Kapruka is the best solution to start with. Moreover, through Kapruka Global Shop, you can also enjoy the convenience of purchasing products from renowned platforms like Amazon and eBay and have them delivered to Sri Lanka.Send love straight to their heart this Valentine's with our thoughtful gifts!