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Sri Lanka lashes out at Moody’s after yet another downgrade and warnings of default

The Sri Lankan government has lashed out at credit rating agency Moody’s, after it hit Colombo with yet another downgrade of debt rating, stating that the island was at risk of default without a clear debt repayment plan and low foreign exchange reserves .

“The decision to downgrade the ratings is driven by Moody's assessment that the absence of comprehensive financing to meet the government's forthcoming significant maturities, in the context of very low foreign exchange reserves, raises default risks,” said a Moody’s press release. “In turn, this assessment reflects governance weaknesses in the ability of the country's institutions to take measures that decisively mitigate significant and urgent risks to the balance of payments.”

“Persistently wide fiscal deficits due to the government's very narrow revenue base compound this challenge by keeping gross borrowing needs high and removing fiscal flexibility,” it added.

In response, the Sri Lankan government called the rating “unacceptable” and “ill-timed”, in a spirited press release last week.

“Once again, Moody’s irrational rating action with regard to Sri Lanka comes a few days before a key event, namely the announcement of the Government Budget for 2022,” said Sri Lanka. “This apparent hastiness and the view expressed during discussions with Moody’s analysts that the nature of the Budget is irrelevant to the financing plans of the Government clearly demonstrates the lack of understanding of such analysts.”

“Such action by Moody’s is not new to Sri Lanka since Sri Lanka has experienced similar rating action by Moody’s several times in the past as well,” the press release continued.

Sri Lanka’s official foreign exchange reserves had dropped to $2.5 billion by the end of September, reported Reuters.

The Economist also warned that the country must pay $7 billion between now and July to service its foreign debts. With Sri Lanka's credit rating falling even further, borrowing "in global capital markets is all but impossible,” it added. Commenting on the possibility of an IMF restructuring programme, the Economist warns that the government is unlikely "hard to accept conditions that undermine the country’s much-vaunted sovereignty" and would further lose the confidence of its voters.

Earlier this year, a survey by LMD-NielsenIQ Business Confidence Index (BCI) revealed that the majority of Sri Lankans polled (46%) believed that Sri Lanka's economic situation will worsen over the coming 12 months.

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