The government has expressed disappointment over a downgrade of the country’s sovereign credit to CCC+ from B- by S&P Global, saying the rating agency has ignored a medium term budget framework.
Citibank also last week said the Budget 2021 lacks any credible strategy to reduce Sri Lanka’s indebtedness and pointed out that the country going to the International Monetary Fund for a bailout deal is inevitable.
Following is the full statement issued by State Minister of Money & Capital Markets and State Enterprise Reforms Ajith Nivard Cabraal on 11th December 2020:
Certain agencies which are supposedly “independent” and have been in a great hurry to predict a debt crisis in Sri Lanka as soon as the new government assumed office in November 2019, are now rushing to suggest that the 2021 Budget is unlikely to boost output and that it will add to fiscal pressures.
Their comments are directly opposite to those expressed by Sri Lankan business leaders, top economic analysts and other experts who have unequivocally expressed confidence that the new budget will deal with the debt situation and stimulate enterprises, thereby steering the economy towards stability and growth. Therefore, it seems that the comments of these agencies are being periodically aired to justify their own prophecies, which (fortunately) have failed to ignite a large-scale loss of confidence in the Sri Lankan economy by local and foreign investors.
Nevertheless, the comments of these agencies have caused some degree of concern amongst certain groups of investors who had invested in Sri Lankan International Sovereign Bonds (ISBs), prompting them to sell some of their holdings at significant discounts, thereby suffering unnecessary losses.
On the other hand, another large group of investors (including Sri Lankan investors who held more than US$ 150 million of the October 2020 ISB of US$ 1,000 million and those who are currently holding nearly US$ 330 million out of the June 2021 ISB of US$ 1,000 million) have made substantial gains because they disregarded those comments and decided to “hold” and/or “buy” Sri Lankan ISBs.
In fact, the growing optimism in the Sri Lankan economy has now led to a sharp recovery in prices of ISBs across all maturities, while the Colombo Stock Exchange’s ASPI too had performed outstandingly well, notwithstanding these negative comments.
Sri Lanka takes justifiable pride that it has never failed to honour its debt obligations in its 73-year post-independence history. In particular, that track record was impeccably maintained during the challenging era from 2006 to 2014, in spite of the resource-sapping effort to defeat terrorism, the Debt to GDP ratio being 91 percent in 2005, the escalation of several major domestic and external challenges, and the determined efforts of vested interest groups to tarnish Sri Lanka’s image. It may also be recollected that some serious attempts to destabilise the economy were launched with great vigour from May 2009 onwards by several so-called “independent” and “international” agencies immediately after the successful conclusion of the 30-year terrorism conflict, as well.
Notwithstanding all those challenges, the Sri Lankan authorities of that era were able to protect and maintain the country’s impeccable debt-repayment record through prudent, innovative and effective management of the macro-economic fundamentals and innovative debt management measures. The new government of President Gotabaya Rajapaksa presented the Budget 2021 on 17th November 2020 in line with the aspirations of the Sri Lankan people who elected the President and the new Government with unprecedented majorities. In spite of the Covid-19 related disruptions to revenue collection in 2020, the Budget 2021 has aimed at promoting economic growth through the boost of the domestic production base, expansion of exports and the attraction of foreign investment through the implementation of a clear reform agenda.
Curtailing foreign borrowing and streamlining project financing is expected to address the weaknesses that had developed in the economy as a result of the accumulation of the high foreign debt by the Yahapalana Government from 2015 to 2019 where ISBs totalling a massive US$ 6.9 billion (cost of 6 Hambantota Ports or approximately 9.8 percent of the 2019 GDP) were issued in a brief 15-month period from April 2018 to June 2019. Ironically, this borrowing spree was hailed by some local and international quarters as being a “huge success”, but those same persons are today bemoaning that the debt situation in Sri Lanka is challenging.
The new government’s integrated economic strategy to stabilise the Rupee, maintain low levels of interest, improve revenue collection through higher economic growth and better tax administration, support businesses and individuals with business-friendly measures, and direct public investment effectively is bound to consolidate the fiscal performance in the short to medium term. Further, the Budget 2021 has provided a clear direction with regard to the mega development projects of the Port City and Hambantota Industrial Zone which are expected to attract unprecedented inflows of Foreign Direct Investment in the next year and beyond. Already, a healthy investment pipeline for the Port City and other manufacturing and services industries is being observed. In addition, the support from multi-lateral agencies in terms of policy-based lending as well as the commitment of friendly nations and reserve banks to boost the level of Sri Lanka’s official reserves through SWAPs and other instruments is likely to address short term foreign currency liquidity considerations and the longer term fund requirements to meet the growth aspirations of the country.
In that background, it is very likely that investors who have placed trust in Sri Lanka’s potential will not be distracted by ill-advised and subjective comments made by hostile external spectators, politically-motivated elements and biased agencies that are operating under an “independent” label.