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Fitch downgrades Sri Lanka for on debt default risk

Sri Lanka

The decision of Fitch Ratings Agency to downgrade the credit rating of Sri Lanka has drawn the ire of the Central Bank.

Fitch has downgraded Sri Lanka’s credit rating, at a time when the country is experiencing a severe financial crisis.

Fears are growing that Sri Lanka will default on its $26 billion foreign debt, while Colombo says it will honor its commitments.

Sri Lanka’s central bank described Fitch’s move as “reckless” and accused the agency of ignoring “positive developments” in the country’s economy.

The downgrade from “cc” to “ccc” came a day after an official Sri Lankan report stated that the country’s economy recorded a contraction of 1.5 percent in the third quarter of this year, in the midst of the crisis of the depreciation of the local currency that hinders the country’s recovery from the Covid-19 pandemic.

Fitch announced that the downgrade of Sri Lanka’s credit rating reflects the agency’s expectation of “the increasing probability of debt default in the coming months.” Sri Lanka’s foreign exchange reserves declined to $1.58 billion at the end of November.

Difficulty fulfilling obligations

“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.

In its statement, the Sri Lankan Central Bank stressed the need to note that the government has given clear guarantees that Sri Lanka will honor its debt obligations in the coming period.

Fitch indicated that Sri Lanka must repay two international sovereign bonds: the first, worth $500 million, due in January 2022; and the second, worth $1 billion, due in July of the same year.

The inflow of capital into the country of 21 million people has seen only a slight improvement.

In the second quarter of this year, Sri Lanka’s economy recorded a growth of 12.3%, but a new outbreak of Covid-19 forced the country to impose a curfew for 41 days, which caused great damage to the services and industry sectors, according to what was announced Friday by the Statistics Office.