Sri Lanka’s credit rating outlook was downgraded to negative following the ‘marked’ decline in the country’s foreign exchange reserves.
Down grading Sri Lanka’s credit rating outlook from stable to negative, Fitch Ratings on Friday February 27, rated Sri Lanka’s long-term foreign currency rating at B+, four levels below investment grade.
Fitch also cited concerns about the stresses in the country's balance of payments, its fiscal deficit and the government's increased reliance on foreign-currency borrowing in recent years.
"Without a sharp contraction in domestic demand to curtail imports, or a significant depreciation of the exchange rate to otherwise correct the trade imbalance, Sri Lanka may not have access to sufficient international funding to cover the current account shortfall and its international debt repayments, resulting in ongoing pressures on official reserves," the rating agency said in an email statement.
Credit rating was not the only economic indicator that projected a bleak outlook for the country. In the same week the rating was downgraded the local currency hit an all time low value and the parliament was told that the country’s outstanding debt is at an all time high.
All time low
Sri Lanka's rupee, which has been steadily losing value in the past few months, hit a new all-time low of 115.75/95 a dollar on Friday February 27 amid import dollar demand from state banks, according to brokers.
"The dollar is sold at 115.75 level and the offer is at 115.95," said a currency broker, who asked not to be named.
Three other dealers confirmed the rate. "State banks are buying dollars for import bills, while one state bank still sells dollar at 114.25."
Record debt
On Thursday February 19, Sri Lanka’s Revenue minister, Ranjith Siyambalapitiya announced in the parliament that the country’s total debt in the past 8 years had exceeded Rs. 3,400 billion.
The minister further said that interest costs stemming from local and foreign loans had more than doubled during the same period.
From 2001 to 2008, the country’s total local and foreign debt amounted to Rs. 3,436,837 million and by the end of last year interest costs per year was at a record Rs. 210 billion. An increase of Rs. 16 billion compared to the Rs. 94 billion interest costs in 2001.
Presidential confession
Sri Lankan political leaders who have been claiming that
President Rajapakase’s Mahinda Chnintana has saved Sri Lanka from the devastation of the global economic meltdown, are now starting to realise the direction the country’s economy is heading.
Rajapaksa speaking at a SAARC meeting last week labelled the financial crisis as a "common challenge to our region and to the world".
"The effects of synchronised slow-down in developed economies, can reach us sooner than later," Rajapaksa cautioned.
Sri Lanka’s economic growth slowed to 6.3 percent in the third quarter of 2008 from 7 percent in the previous three-month period as declining overseas demand eroded the country’s key exports - tea, rubber and textile.
