International rating agency Fitch demoted cash-strapped Sri Lanka a notch to “CC” on Saturday because of growing fears of a sovereign default on its $ 26 billion foreign debt.
The downgrade came a day after Sri Lanka reported a 1.5% contraction in the third quarter of this year, as a currency crisis ruined its recovery from the coronavirus pandemic.
Fitch said the downgrade reflected his vision of “an increased likelihood of a default event in the coming months” as Sri Lanka’s foreign exchange reserves collapsed to $ 1.58 billion in late November.
“We believe that it will be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new sources of external financing,” the agency said in a statement.
He noted that Sri Lanka had to repay two international sovereign bonds of $ 500 million in January 2022 and $ 1.0 billion in July 2022 with little improvement in capital inflows to the 21 million country. inhabitants.
Foreign currency debt service payments, including principal and interest, for next year total $ 6.9 billion, equivalent to nearly 430% of the island’s official gross international reserves as of November 2021 .
“The cumulative service of foreign currency debt, including interest and principal, is approximately $ 26 billion from 2022 to 2026,” Fitch said.
The island’s economy, dependent on tourism, has been hit hard by the pandemic and the authorities reacted to the decline in foreign exchange reserves with a broad import ban, triggering shortages, especially of food and fuel. and drugs.
The crisis has spread to industry and services, and agriculture has also suffered greatly from the ban on imports of agrochemicals.
Sri Lanka’s economy grew 12.3% in the second quarter, but a third wave of infections that forced a 41-day curfew severely hit services and industries, the statistics office said on Friday. .
Its foreign exchange reserves of 1.58 billion dollars at the end of November against 7.5 billion dollars when the government of Gotabaya Rajapaksa took power two years ago.
Supermarkets rationed staples such as powdered milk, sugar, lentils, canned fish and rice, with commercial banks running out of dollars to finance imports.
The central bank has appealed for foreign currencies, even loose change that people may have after returning from trips abroad, as the government desperately searches for dollars.
The banking regulator has also warned that it will freeze the accounts of informal money changers who offer higher prices for hard currencies than official exchange rates.