News

Economic crisis: Govt. looking at a downgrade

  • World Bank proposes that Govt. consider a downgrade from IBRD
  • Downgrade will open access to grants and low interest rates
  • Govt. seriously considering move to open access: Siyambalapitiya

By Our Political Editor

 

The Government is currently engaged in a serious discussion to downgrade Sri Lanka’s country classification among the World Bank’s ‘country and lending groups,’ following a proposal by the World Bank to the Government to consider a downgrade to gain access to more funding, The Sunday Morning learns.

It is learnt that downgrading Sri Lanka in the World Bank’s country classification in relation to lending groups will enable the Government to access more financial grants as well as loans at low interest rates.

Sri Lanka is classified at present as an International Bank for Reconstruction and Development (IBRD) country.

When inquired, State Minister of Finance Ranjith Siyambalapitiya confirmed to The Sunday Morning that the World Bank had made a proposal to the Government to consider a downgrade and that the Government was currently discussing the matter. 

“The World Bank has asked the Government if we were agreeable to such a move,” he said.

Siyambalapitiya noted that the Government believed that actions similar to a downgrade might be required to address the ongoing economic crisis since it would provide access to grants and funding at concessionary rates. 

“We are an IBRD country now and we might have to look at going down to a small economy. Discussions are currently ongoing on this issue and it might have to be done in order to address the current crisis,” the State Minister explained.

Sri Lanka will effectively be reduced from a lower middle-income country to a low-income country along with the downgrade.

The Government, it is learnt, is dependent on finalising the agreement with the International Monetary Fund (IMF) by this December in order to address the increasing economic challenges. 

However, the IMF Mission Chiefs for Sri Lanka Peter Breuer and Masahiro Nozaki last week stated that a timeframe could not be attached to when the IMF deal for Sri Lanka would be finalised. This has resulted in the Sri Lankan Government having to seriously look at ways to raise funds, especially for the purchase of essentials by the end of the year. 

A senior Government official also told The Sunday Morning that the priority for the Government at the moment was to open access for funding for the country.

However, a senior economist, on conditions of anonymity, told The Sunday Morning that while the country was in need of access to grants and low interest rates, the impact of such a downgrade would be felt by the overall economy. 

The economist further noted that more time would be required to extensively ascertain the overall impact.

In 2017, Sri Lanka graduated from the International Development Association (IDA), the World Bank Group’s soft lending arm, to the IBRD level, which resulted in an increasing share of World Bank commitments to the country.

While the IBRD lends to governments of middle-income and creditworthy low-income countries, the IDA provides interest-free loans and grants to governments of the poorest countries.

Meanwhile, there is also another classification for countries other than IDA and IBRD, which is Blend. Blend countries are those which are IDA eligible based on per capita income levels and also creditworthy for some IBRD borrowing.

The current World Bank classification on financial borrowings from bottom to the top is as follows: IDA small economy, IDA Regular, Blend, and IBRD. However, given that Sri Lanka is engaged in a debt restructuring process, the country’s creditworthiness will not enable it to be classified as a Blend country. Therefore, Sri Lanka will have to be downgraded to an IDA small economy.