Fitch Rating downgrades Sri Lanka's IDR from CCC to CC

Colombo: The leading credit rating agency Fitch Ratings has downgraded Sri Lanka's long-term foreign-currency Issuer Default Rating (IDR) from 'CCC' to 'CC' as the country struggles to overcome the ongoing financial crisis.

The rating agency has downgraded the Indian Ocean island nation's economic situation, citing an increased risk of default as liquidity injections to sterilise interventions and enforce a 6% policy rate continue to drain reserves and cause currency shortages. "The downgrade reflects our view of an increased likelihood of a default event in the coming months, owing to Sri Lanka's deteriorating external liquidity position, as evidenced by a drop in foreign-exchange reserves against high external debt payments and limited financing inflows." "The severity of financial stress is reflected in elevated government-bond yields and downward pressure on the currency," Fitch Ratings stated in support of its outlook on Lanka.

"Sri Lanka's foreign-exchange reserves have declined much faster than we expected at our last review, owing to a combination of a higher import bill and Central Bank of Sri Lanka foreign-currency intervention." Since August, foreign exchange reserves have fallen by about USD2 billion, falling to USD1.6 billion at the end of November, equivalent to less than one month of current external payments (CXP). This represents a USD4 billion decrease in foreign-currency reserves since the end of 2020. Fitch Ratings also stated that despite currency swap facilities from India and China, Sri Lanka would struggle.

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