Sri Lanka’s Path to Recovery still remains uncertain – Fitch

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Even though the Sri Lankan authorities are now speeding up their discussions with the International Monetary Fund (IMF), the situation still remains quite uncertain as to how quickly Sri Lanka will be able to resolve these prevailing economic issues and move ahead with an IMF programme, global rating giant Fitch ratings said.

Therefore, they were concerned about three key factors for their future rating reviews mainly, Sri Lanka’s possible staff level agreements with the IMF, the success of the ongoing debt restructuring process and the political stability of the country.

Addressing a recent Fitch ratings webinar on ‘Asian Frontier Economies – Navigating the Emerging Challenges’ Fitch ratings Asia-Pacific Director of the sovereign ratings (Sri Lanka and Bangladesh) Sagarika Chanda said they were closely monitoring the Sri Lanka’s challenging situation.

Fitch Ratings has recently downgraded sovereign rating to ‘C’ from ‘CCC’ after the suspension of foreign debt repayments. But Local currency debt has been excluded.

“ We as Fitch ratings  have affirmed the local currency rating a ‘CCC’ because the government still continues to service its local currency debt that we are assuming that it will continue but this is something we are closely monitoring given that the economic challenges in Sri Lanka are quite, severe,” she said.

Sri Lanka’s foreign reserves are at a very low level and it is usually only a matter of days or weeks, so the authorities are working to meet their short-term foreign currency needs through multilateral and bilateral relations until a formal agreement is reached with the IMF. Inflation in Sri Lanka is also high. That is because of the shortage of essential food items caused by the shortage of foreign exchange. This was also affected by the shortages in the supply of essential food items due to the Russia-Ukraine crisis and also due to the depreciation of the rupee.

 “So, inflationary pressures are extremely high in Sri Lanka at the moment therefore we  don’t see in the near term, the pressures easing off in any significant way”, she predicted.

She also said, Sri Lanka has a very high level of public debt level as the total public debt of Sri Lanka as a percentage of GDP has exceeded 100 per cent.

“Without having any kind of significant fiscal consolidation process, we don’t see the debt trajectory stabilising in the medium term. And one of the key reasons also apart from other factors is that the revenue ratio in Sri Lanka is quite low. It’s one of the lowest that we have. So that just adds to the challenge of fiscal consolidation,” she asserted.

She said, the political stability in Sri Lanka is gradually recovering and that further revisions to Sri Lanka’s credit rating could be made in view of the successes of the ongoing debt restructuring process.

She added that there is a tendency for Sri Lanka’s economic forecasts for this year to be revised in the future.

By Ishara Gamage