Sri Lanka ruled out an IMF bailout on Wednesday and planned more loans, including from China, to address its worsening economic crisis – but was swiftly hit with another international ratings downgrade.
Within hours of Colombo announcing it was in talks with Beijing for a large loan from China, the largest bilateral lender to the island, S&P Global downgraded Sri Lanka one more notch to CCC from CCC+.
The island’s tourism-dependent economy has been battered by the pandemic, with supermarkets rationing goods and rolling blackouts imposed by power utilities unable to fund oil imports.
S&P Global said the downgrade reflected the deterioration of Sri Lanka’s ability to maintain foreign reserves and the higher risk of a sovereign default.
“Timely debt service will likely become increasingly difficult over the next 12 months, given Sri Lanka’s vulnerable external profile, sizeable fiscal deficits, heavy government indebtedness, and hefty interest payments,” S&P said.
Looming Default
Other international rating agencies too have warned of a looming sovereign default on Sri Lanka’s $35 billion foreign debt as the treasury battles a crunch on foreign exchange reserves.
Last month, Fitch downgraded a key sovereign debt rating to CCC, its lowest grade.
“The downgrade reflects our view of an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in foreign-exchange reserves set against high external debt payments and limited financing inflows,” said a Fitch team led by Sagarika Chandra, a Hong Kong-based primary rating analyst.
Central bank governor Ajith Nivard Cabraal rejected mounting calls from local and international economists to seek an International Monetary Fund bailout and debt restructure.
“The IMF is not a magic wand,” he told a news conference in Colombo. “At this point, the other alternatives are better than going to the IMF.”
Talks in ‘Advanced Stage’
Cabraal added that talks with China over a new loan were at an “advanced stage”, and a fresh agreement would service existing debt to Beijing.
“They would assist us in making the repayments… the new loan coming from China is in order to cushion our debt repayments to China itself,” he said.
Cabraal’s remarks come days after a visit from Chinese Foreign Minister Wang Yi, who discussed a debt payment restructure with President Gotabaya Rajapaksa.
Sri Lanka has borrowed heavily from China for infrastructure in the past, some of which ended up as white elephants.
Unable to repay a $1.4 billion loan for a port construction in the south, Sri Lanka was forced to lease out the facility to a Chinese company for 99 years in 2017.
Washington fears the Hambantota port will be used as an overseas Chinese naval base and has warned that China’s Belt and Road Initiative lending practices are a ‘debt-trap’.
- AFP with additional editing by George Russell
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