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Moody’s downgrades Sri Lanka’s sovereign rating; Central Bank calls it 'untimely'

Moody’s Investors Service has downgraded Sri Lanka’s sovereign rating, taking the country’s credit deeper into speculative-grade as foreign reserves continued to fall amid money printing and crippled forex markets

Oct 28, 2021
Moody’s downgrades Sri Lanka

Moody’s Investors Service has downgraded Sri Lanka’s sovereign rating, taking the country’s credit deeper into speculative-grade as foreign reserves continued to fall amid money printing and crippled forex markets. However, Sri Lanka’s apex bank described the decision as “untimely” and claimed the rating agency has not collected all the relevant information to form a proper assessment of the country’s performance.

Moody’s, in its report, said Sri Lanka’s non-debt generating inflows have increased but financially the country remained insecure.

“A large financing envelope that Moody’s considers to be secure remains elusive and the sovereign continues to rely on piecemeal funding such as swap lines and bilateral loans, although prospects for non-debt generating inflows have improved somewhat since Moody’s placed Sri Lanka’s rating under review for downgrade,” the rating agency said, as it downgraded to the country to Caa2 from Caa1,

“Persistently wide fiscal deficits due to the government’s very narrow revenue base compound this challenge by keeping gross borrowing needs high and removing fiscal flexibility.

“The decision to downgrade the ratings is driven by Moody’s assessment that the absence of comprehensive financing to meet the government’s forthcoming significant maturities, in the context of very low foreign exchange reserves, raises default risks.”

Liquidity injections and dysfunctional forex markets following the loss of confidence in the domestic currency had made it difficult to transfer wealth out of the country through the credit system not just for debt but also for current transactions. As a result, the country is also seeking credit lines for imports.

The Central Bank of Sri Lanka has said the latest downgrade was done just before a Budget in November and attempts were being made to bring inflows.
“This untimely rating decision taken before the Budget shows that Moody’s has not taken all the relevant information to form its assessment of the country’s performance and the expected path, into account,” the central bank said.

“Even a layman would recognize that the Budget is an important statement for a country as it sets the tone for policy initiatives and structural reforms which could help alleviate the external challenges and improve fiscal settings in the near to medium term.”

The assessment has failed to recognize the medium to long-term funding arrangements that are being finalized with various bilateral sources, which are due to be materialized in the near term, the statement said.

“The GOSL and the CBSL are closely engaging with all stakeholders, including the international investor community. Such engagements have helped clear any doubts of investors on the Government’s willingness and the ability to honor all upcoming debt service obligations, as it has done throughout history.”

On Wednesday, a senior Sri Lankan economist said the country’s 2022 budget will not be able to provide relief to the public given the shaky nature of the budgetary management and lack of sources to finance it.

Finance Minister Basil Rajapaksa will deliver the 2022 budget on November 12 and it is expected to be one of the trickiest budgets in Sri Lankan history amid sharp revenue shortfall, rising expenditure and excess money printing which has depleted foreign currency reserve and made it difficult to repay debt or and also import foods.

The Covid-19 pandemic has made it worse, though lack of reforms for cohesive and long-term economic policy and intensified monetary instability from lack of rule-based monetary policy have been the key reasons for Sri Lanka’s economic ailments.

 “They’re expecting a big relief from the budget,” senior economist Sirimal Abeyratne said, according to EconomyNext. “Obviously the budget cannot provide relief without somebody out there to finance it.”

Sri Lanka’s public is usually made to expect ‘relief’ from budgets by politicians, who – sometimes unknowingly – destroy the currency and push up the cost of living on, egged on by stimulus-happy bureaucrats and ‘economists’ who want to keep interest rates down.

Sri Lanka recently ended price controls, which were used to create shortages by the Consumer Affairs Authority, amid money printing, leading to a sharp rise in some goods. Goods without price controls have already gone up.

Sri Lanka’s revenue has fallen to a record low of 9.2 percent of the GDP in 2020 since the data available from 1950, from a record high of 28.9 percent in 1978.

The monetary instability, critics say, denied the country the benefit of economic liberalization and triggered strikes and social unrest though free trade and foreign investment led to export growth.


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