International ratings agency Fitch downgraded cash-strapped Sri Lanka on Saturday by one notch to ‘CC’ due to mounting fears of a sovereign default on its $26 billion foreign debt.
The downgrade came a day after Sri Lanka reported a 1.5% contraction in the third quarter of this year as a foreign exchange crisis wrecked its recovery from the coronavirus pandemic.
Fitch said the downgrade reflected its view of an “increased probability of a default event in coming months” as Sri Lanka’s foreign reserves slumped to $1.58 billion at the end of November.
“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,” the agency said in a statement.
It noted Sri Lanka had to repay two international sovereign bonds of $500 million in January 2022 and $1 billion in July 2022 with little improvement in capital inflows into the nation of 21 million people.
Foreign-currency debt service payments, including principal and interest, for next year total $6.9 billion, or the equivalent of nearly 430% of the island’s official gross international reserves as of November 2021.
“Cumulative foreign-currency debt service, including interest and principal, amounts to about $26 billion from 2022 through to 2026,” Fitch said.
The island’s tourism-dependent economy was hammered by the pandemic and authorities responded to falling foreign exchange reserves with a broad import ban, triggering shortages including food, fuel and medicines.
The crisis has spread to affect manufacturing and services and agriculture has also suffered badly due to a ban on agrochemical imports.
Sri Lanka’s economy had grown 12.3% in the second quarter but a third wave of infections that forced a 41-day curfew saw services and industries heavily affected, the statistics office said on Friday.
Its foreign reserves of $1.58 billion at the end of November compared with $7.5 billion when the government of Gotabaya Rajapaksa took over two years ago.
Published in The Express Tribune, December 19th, 2021.