The government yesterday said that the international rating agency had completely ignored the current ground realities and the ongoing economic recovery of the country, after the COVID-19-related lockdowns.

On Monday, Moody’s downgraded Sri Lanka’s sovereign rating by unusual two notches to Caa1 (CCC+ equivalent), on deepening fiscal-side constraints, higher foreign debt risks and perceived weaknesses in the country’s institutions and governance. The outlook was changed to stable.

Money, Capital Markets and Public Enterprise Reforms State Minister Ajith Nivard Cabraal said this downgrade by Moody’s had not taken into consideration the recent positive developments in Sri Lanka’s economy.
“Moody’s rating downgrade fails to recognise and do justice to the ground reality of the ongoing rapid economic recovery, backed by vastly improved business confidence, arising from the return of political and policy stability after a lapse of five years,” he said.

Cabraal pointed out that Sri Lanka, like many of its peers in the emerging market group, experienced initial capital outflows, exchange rate depreciation, slowdown in activity and pressure on government finances, in response to the effects of the COVID-19 pandemic.

But with the successful handling of the crisis situation, the country has moved on to a recovery path of growth and stability. Sri Lanka’s external sector’s performance has improved significantly since May, with export earnings reaching pre-COVID averages of US $ 1 billion a month.

According to the Central Bank estimations, by end-December 2020, the cumulative trade deficit is expected to be US $ 5.8 billion, significantly down from US $ 8 billion in 2019.

Also, identifying the vulnerabilities in the country’s external sector, the government decided to put a lid on non-essential imports to preserve the country’s foreign reserves and ensure currency stability, in order to prioritise external debt service obligations.

The savings on the import bill, due to the curtailment of non-essential imports as well as the significant reduction in the fuel import bill, are expected to be over US $ 2.0 billion.