INSUBCONTINENT EXCLUSIVE:
The successful formation of a government under the new president, Ranil Wickremesinghe, is an important precondition for resolving Sri
Lanka’s debt default, but many challenges remain as the country seeks financing support from the IMF and debt restructuring from private
and official bilateral creditors, says Fitch Ratings.“The new president was confirmed by a large majority in parliament, and his
government has drawn in some opposition members,” the credit rating agency said adding that this gives some hope that it will have
sufficient support to negotiate and carry out difficult reforms as part of efforts to restore macroeconomic stability and debt
sustainability.Fitch Ratings also noted that such reforms could unlock funding support from the IMF, which it views as important for Sri
Lanka’s emergence from default.The statement also read: “The government’s parliamentary position appears strong, but public support
for the government is weaker
President Wickremesinghe was prime minister in the previous administration under President Gotabaya Rajapaksa, who was brought down by
Parliament and the government also remain dominated by politicians from the Sri Lanka People’s Freedom Alliance, which is closely
affiliated with the Rajapaksa family.”The credit rating agency pointed out that this may increase the risk of further destabilising
protests if economic conditions do not improve and/or reforms generate public opposition.“We expect any reform package agreed with the IMF
by the government to include elements such as higher taxes, expenditure rationalisation and a commitment to a greater degree of
exchange-rate flexibility
There is a significant risk that such reforms could cause public opposition that might impede their implementation
In the absence of an IMF deal, we expect Sri Lanka to face a very strained external position in the near term
The country has little foreign exchange to pay even for essential imports such as fuel, food and medicines, with official reserve assets at
just USD1.9 billion (just over one month of imports) as of end-June.”In a statement on 30 June, the IMF noted that it assessed Sri
Lanka’s public debt as unsustainable, and confirmed that it would require adequate financing assurances from Sri Lanka’s creditors that
debt sustainability would be restored.Debt negotiations could be complicated by debt owed to China, Fitch Ratings added
“This amounted to USD 5 billion at end-2020, including bilateral official lending and loans from the China Development Bank and
Export-Import Bank of China, accounting for around 13% of Sri Lanka’s external debt, according to the IMF
China has traditionally preferred to offer relief for large loans through deferrals such as maturity extensions, payment rescheduling or
grace periods, rather than through write-downs
However, this approach could increase challenges for Sri Lanka to successfully negotiate debt restructuring with other creditors, including
private creditors, that delivers the debt sustainability sought by the IMF.”Fitch Ratings said that it rates Sri Lanka’s Long-Term
Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘RD’ (Restricted Default), adding that the “Long-Term Local-Currency IDR is
‘CCC’, and is Under Criteria Observation following our introduction of +/- modifiers in the ‘CCC’ category
A default on local-currency debt could erode local banks’ capital positions, possibly leading to government capital injections into the
banking sector that would erode the net benefits of such a restructuring, and when we affirmed the Long-Term Local-Currency IDR in May we
assumed that the government would continue to service local-currency debt.”Nonetheless, the ‘CCC’ rating reflects a high risk that
local-currency debt will be included in debt restructuring, as the stock and interest costs are large, and omitting it could increase the
restructuring burden on holders of foreign-currency debt, the statement read further.Fitch Ratings said that it may move Sri Lanka’s LTFC
IDR out of ‘RD’ upon the sovereign’s completion of a commercial debt restructuring that it judges to have normalised the relationship
with the international financial community.
This article first appeared/also appeared in https://adaderana.lk
