Business
Fitch downgrades Sri Lanka’s long-term foreign-currency IDR to ‘CC’
Fitch Ratings has downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CC’, from ‘CCC’. Fitch typically does not assign Outlooks or apply modifiers for sovereigns with a rating of ‘CCC’ or below.
A number of rating actions are as follows.
The downgrade reflects our view of an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in foreign-exchange reserves set against high external debt payments and limited financing inflows. The severity of financial stress is illustrated by elevated government-bond yields and downward pressure on the currency.
We have affirmed the Long-Term Local-Currency IDR at ‘CCC’, as authorities have continued access to domestic financing, despite high and still-rising government debt and an elevated debt service burden.
Sri Lanka’s foreign-exchange reserves have declined much faster than we expected at our last review, owing to a combination of a higher import bill and foreign-currency intervention by the Central Bank of Sri Lanka. Foreign exchange reserves have declined by about USD2 billion since August, falling to USD1.6 billion at end-November, equivalent to less than one month of current external payments (CXP). This represents a drop in foreign-currency reserves of about USD 4 billion since end-2020.
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. Obligations include two international sovereign bonds of USD500 million due in January 2022 and USD1 billion due in July 2022. The government also faces foreign-currency debt service payments, including principal and interest, of USD6.9 billion in 2022, equivalent to nearly 430% of official gross international reserves as of November 2021. Cumulative foreign-currency debt service, including interest and principal, amounts to about USD26 billion from 2022 through to 2026.
The timing and availability of external resources is unclear and may not be readily available for debt service. The central bank published a six-month roadmap in October that outlined plans to raise additional external borrowings through a number of channels, including bilateral and multilateral sources, syndicated loans and through the monetisation of under-utilised assets in 1Q22.
A drawdown on the existing currency swap facility with the People’s Bank of China (PBOC) could boost reserves by up to CNY10 billion (USD1.5 billion equivalent). However, even with resources from the swap facility, foreign exchange reserves are likely to remain under pressure, in our view. Additional sources of financing could come from an economic support package from India, which contains a swap facility under the South Asian Association for Regional Cooperation currency framework of USD400 million, a swap facility with the Qatar Central Bank, remittances securitisation and a revolving credit facility with the Bank of China Limited (A/Stable). However, even if all these sources are secured, we believe it will be challenging for the government to maintain sufficient external liquidity to allow for uninterrupted debt servicing in 2022.
Press reports suggest the government may be contemplating IMF financing; an IMF programme would unlock multilateral financing, but we believe the Fund could well suggest restructuring to bring about debt sustainability.
Sri Lanka’s external finances are further challenged by a persistent current account deficit, resulting in downward pressure on the exchange rate. We estimate that the deficit widened to about 5.7% of GDP in 2021 and expect it to remain at about 4.0% in 2022, before falling to 2.1% by 2023. A plunge in remittances, a weak tourism recovery and rising imports have contributed to the wider current account deficit. Travel and tourism, an important economic driver, has been hit hard by the COVID-19 pandemic and the outlook for a recovery remains uncertain given the emergence of new highly transmissible virus variants.
The Sri Lankan rupee/US dollar spot exchange rate depreciated by 7%-8% since end-2020, and the central bank intervened to support the currency, exacerbating the decline in reserves.
Wide fiscal deficits continue to worsen the outlook for debt sustainability. The 2021 fiscal deficit target of 8.9% of GDP was missed by a wide margin, and we expect the government deficit to widen to about 11.5% of GDP in 2022. We believe 2022 revenue targets are optimistic, especially in light of our expectation of weak economic activity. We forecast general government debt to reach about 110% of GDP by 2022, and to keep rising under our baseline, absent major fiscal consolidation.
We also believe it is unlikely that Sri Lanka will meet its 2025 government debt reduction target of about 89% of GDP or narrow the fiscal deficit to 4.8% of GDP. Rising interest payments are a major driver of the widening deficit and the interest/revenue ratio of at about 95.0% is well above the peer median of 11.3%.
Sri Lanka’s economic performance is likely to weaken in 2022, as the challenging external position and exchange-rate pressure will have knock-on effects on economic activity. Foreign currency shortages in 2021 hampered food and fuel imports, and continued external liquidity stress could worsen supply shortages, hurting economic activity. We expect growth to slow to 2.0% in 2022, from an estimated 3.6% in 2021, before recovering to 4.3% in 2023 partly due to base effects and a gradual easing of domestic pressures, although downside risks to our forecasts remain. Sri Lanka’s economy was expanding at a modest pace prior to the pandemic, which led real GDP to contract by 3.6% in 2020.
ESG – Governance: Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights. This reflects the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Sri Lanka has a medium WBGI ranking at the 47th percentile, reflecting a recent record of peaceful political transitions and a moderate level of rights for participation in the political process. As Sri Lanka has a percentile rank below 50 for the governance indicator, this has a negative impact on the credit profile.
The Sri Lankan government has intensified its efforts to mitigate human-elephant conflicts and reduce elephant fatalities, allocating substantial funds in the 2025 budget for elephant conservation. The Department of Wildlife Conservation (DWC) has introduced a range of targeted measures, emphasizing public participation and localized interventions.
Recognizing the critical role of local communities, the government has launched awareness programs in high-risk Grama Niladhari divisions. By 2025, 23 villages have been identified for intervention, with 43 awareness programs planned. These initiatives aim to educate residents on coexistence strategies and reduce human casualties.
To physically deter elephants from entering villages, authorities are fast-tracking the construction of electric fences and the establishment of watch posts. The Civil Security Force will play a key role in these operations, enhancing protection through continuous monitoring and rapid response mechanisms.
In response to the alarming rise in illegal elephant killings, the government has reaffirmed its commitment to enforcing the Flora and Fauna Protection Ordinance. The Department of Wildlife Conservation has warned that perpetrators who engage in poaching or use firearms and explosive traps will face severe legal consequences, including criminal prosecution and heavy penalties.
Commenting on these developments, Ranjan Marasinghe, Director General of the Department of Wildlife Conservation, stressed the urgency of the situation:
“Sri Lanka’s wild elephant population is an invaluable national asset and balancing conservation with human safety is a top priority. Our latest initiatives integrate community-driven solutions with stronger legal enforcement to ensure the long-term survival of elephants while protecting human lives.”
Manjula Amararatne, Director of Protected Area Management, emphasized the department’s proactive stance:
“By enhancing physical deterrents such as electric fences and engaging local communities in conservation efforts, we are creating sustainable solutions to minimize conflicts.”
Meanwhile, U.L. Taufiq, Deputy Director (Elephant Conservation), stressed the role of law enforcement:
“Illegal elephant killings must stop. We are working closely with the judiciary to ensure those responsible face the full extent of the law.”
by Ifham Nizam
Dr. Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, assured on Wednesday that a systemic economic “trickle-down” effect would create new employment opportunities, generate greater economic dividends, and provide better government services to the people, among other benefits.
The Governor’s remarks came in response to a question posed by The Island Financial Review:
The Island: “Governor, Sri Lankan banks have reported robust profits and strong balance sheets, yet ordinary citizens remain trapped in a daily struggle for survival. At a recent business forum, a prominent banker argued that the ‘trickle-down effect’ would eventually alleviate public hardship. Do you agree with this theory, and if so, when will Sri Lankans actually feel relief in their lives?”
Governor: “The banking sector’s return on equity aligns with sustainable business practices. The banking industry, like tourism, manufacturing, or any other sector, must generate reasonable profits to survive and expand. This profitability is not unique to banks; it is a prerequisite for broader economic recovery. During the crisis, many sectors collapsed, but banks could not afford losses, as public trust hinges on their stability. Had banks failed, depositors would have panicked, triggering a bank run. We instructed banks to prioritise stability while accepting modest profits during the worst of the crisis. Their current profits remain disproportionate compared to other sectors. As the economy strengthens, recovery will generate jobs, dividends, and services, enabling the trickle-down effect to reach all citizens.”
The Governor made these remarks during the Q&A session following the second Monetary Policy Review for the period up to March 2025.
When asked whether the Central Bank was intervening to safeguard the rupee, the Governor replied, “We have been purchasing US dollars—we buy dollars from the market.”
On foreign exchange supply and demand, he stated, “It fluctuates daily for various reasons. In February and March 2024, we observed foreign inflows into government securities. Meanwhile, exporters and the remittance sector are performing well. Import demand remains stable at healthy levels. Thus, there is a ‘nice balance’ between foreign exchange inflows and outflow.”
According to the Review, rupee liquidity remains in surplus, and market interest rates continue to decline in line with the eased monetary policy. Credit flows to the private sector remain robust, supported by low interest rates. The Central Bank expects this trend to continue, bolstering domestic economic activity.
The Governor also noted that car import orders received thus far total approximately USD 200 million.
Authorities had initially projected USD 1 billion would be required to meet the car import demand after an import ban that lasted nearly 5 years and that would help accrue significant amount of taxes to the Treasury.
By Sanath Nanayakkare
CEAT Kelani Holdings has been adjudged the best-managed tyre manufacturing company in Sri Lanka and reaffirmed as one of the top 20 companies in the country for best management practices, by the Institute of Chartered Professional Managers (CPM) Sri Lanka.
The company received the Category Award in the ‘Tyre, Rubber, Metal & Wood Furniture’ sector at the 2025 edition of CPM’s ‘Best Management Practices Company Awards’ in addition to the Top 20 award presented at the awards gala. This is the second consecutive year that CEAT Kelani was recognised as one of the best managed companies in Sri Lanka.
The CPM awards honour the best practices in management in terms of leadership, policies and strategies, people management, partnerships & resources, processes and performance.
“Awards of this nature will encourage us to strive for even greater heights in management practices, adopting global best practices in aligning strategic direction with a people-centric approach,” CEAT Kelani Managing Director Ravi Dadlani said. “We have already shattered the stereotype for large-scale manufacturing operations and are considered a case study for a successful privatisation of a state-owned enterprise, with unprecedented achievements in productivity, product development, deployment of new technology, research and development, market leadership, sustainability and good corporate citizenship.”
He said CEAT Kelani has transformed from an “inside-out” company to an “outside-in” organisation, placing customer and market centricity at the core of everything it does. This shift is reinforced through regular market visits by employees at all levels, including management, shop floor staff, and all business functions.
Canada PM Mark Carney says old relationship with US ‘is over’
Showers or thundershowers will occur at several places in Western, Sabaragamuwa, Southern, and Uva provinces and in Nuwara-Eliya district after 2.00 p.m
Gender inequality is not a women’s issue, it is a societal issue that demands attitudinal and behavioural transformation. – Prime Minister
-
News6 days agoSeniors welcome three percent increase in deposit rates
-
Features6 days agoThe US, Israel, Palestine, and Mahmoud Khalil
-
News6 days agoScholarships for children of estate workers now open
-
News7 days agoDefence Ministry of Japan Delegation visits Pathfinder Foundation
-
Foreign News4 days agoBuddhism’s holiest site erupts in protests over Hindu ‘control’ of shrine
-
News6 days agoJapanese Defence Delegation visits Pathfinder
-
Editorial7 days agoWhen promises boomerang
-
News7 days agoBan on altar girls upsets nuns, stirs talk on women’s church roles