Fitch on Friday became the latest ratings agency to cut Sri Lanka’s credit score, expressing fears over Colombo’s ability to repay its foreign debts.
Fitch said Sri Lanka’s 2021 budget unveiled last week foreseeing a $8.45-billion deficit in 2021 lacked a “credible fiscal consolidation strategy”.
The international ratings agency downgraded Sri Lanka by one notch to “CCC” from “B”, denoting that a debt default is a “real possibility”.
The downgrade came a day after the Central Bank of Sri Lanka said it had estimated the country’s GDP would shrink by 1.7 percent this year, but Fitch said it was less optimistic and forecast a contraction 6.7 percent.
The central bank announced Thursday that it hoped the country could save about $4.0 billion this year as a result of a ban on non-essential imports such as vehicles.
The import restrictions which were due to lapse at the end of this year are now being extended for another year, the bank said.
Two months ago, Moody’s had downgraded Sri Lanka’s sovereign credit rating by two notches, saying Colombo would struggle to secure funding to service its large external debt.
At the time, the central bank called Moody’s downgrade “unwarranted” and its analysis erroneous.
Both ratings agencies say Sri Lanka will be hard pressed to raise the $4.0 billion required annually in the next five years for foreign debt servicing amid a budget deficit of 8.9 percent of GDP next year.
“I believe that we can manage this budget gap, due to enhanced opportunities to reissue local and international currency denominated debt at maturity,” Prime Minister Mahinda Rajapaksa said.
During his previous tenure as president from 2005 to 2015, Rajapaksa borrowed heavily from China for infrastructure projects, some of which ended up white elephants.
His government insists that they were not caught in a Chinese debt trap as alleged by Western nations, though Colombo has announced plans to raise more loans from China as well as India.