Ratings agency Fitch Ratings (Fitch), in a rather hasty move, downgraded Sri Lanka’s international sovereign rating on Friday demonstrating its failure to recognise the positive developments in Sri Lanka, in an environment in which the entire world is grappling with multiple waves of the pandemic, the Central Bank stated in a media release yesterday.
“This action resembles the recent unwarranted downgrade by Moody’s Investors Service a few days before the National Budget 2022.”
Fitch Ratings downgraded Sri Lanka’s Log-Term Foreign-Currency Issuer Default Rating (IDR) to CC from CCC-. “The sense of urgency on the part of an internationally recognised rating agency to downgrade Sri Lanka is inconceivable, particularly considering the fact that Fitch was being constantly updated by Sri Lankan authorities on the latest developments in all sectors of the economy and imminent foreign exchange inflows. “Despite the lockdown measures that had to be introduced in the third quarter of 2021, the real economy averted a deep contraction during the quarter, signalling Sri Lanka’s adaptability to the new normal. Real GDP, in fact, expanded by 4.4 percent (year-on-year) from January-September 2021, reaffirming the strong possibility of above 4 percent growth in 2021.
“High frequency data on activity point towards a strong recovery of the economy surpassing the pre-pandemic level.
“The Manufacturing Purchasing Managers’ Index reached 61.9 in November 2021, the highest reading for November on record, and way above the pre-pandemic level of activity.
“Indices of the Colombo Stock Exchange reached historical highs, with a large number of Initial Public Offerings in 2021.
“Credit extended to the private sector expanded by over Rs. 685 billion in the ten months to October 2021, compared to about Rs. 260 billion in the corresponding period last year. “The trade deficit continued to decline from May 2021 on a month-on-month basis, supported by record high export earnings. Earnings from merchandise exports recorded an all-time high in October 2021, and preliminary information indicates that earnings have exceeded this record level in November 2021. “With the exchange rate remaining stable since April 2021, except for a few speculation-driven deviations, the conversion of export proceeds and other foreign exchange earnings has also improved substantially in recent weeks.
“An exponential growth in tourist arrivals is observed on a monthly basis, indicating an early reversal of the annual foreign exchange revenue loss of around US dollars 5 billion in the period ahead.
“The prospects for workers’ remittances are bright, with the resumption of worker migration, increased demand for Sri Lankan workers particularly from the Middle East and efforts to facilitate worker remittances through formal channels through an attractive incentive package.
“With such measures, the external current account balance is expected to be maintained at growth supporting levels, thereby accommodating equity capital to the financial account through direct investment to identified projects in the Colombo Port City and Industrial Zones, and the expected monetisation of non-strategic and underutilised assets.
“These developments and the rapid vaccination drive, which is being rolled out nationally, would help realise the potential of the economy over the near to medium term.
“Fitch has also failed to recognise the fiscal reforms introduced through the National Budget 2022. With the introduction of new tax measures, upgraded tax administration systems, and the revival of the economy, the year 2022 is expected to deliver a substantial increase in Government revenue.
“Increasing the retirement age of public sector employees and measures to enhance the viability of state-owned business enterprises are notable reforms, and issuing quarterly warrants for Government institutions instead of annual warrants are expected to instill financial discipline in the use of the allocations, thereby cushioning the expenditure side,” the release added.