Government disputes downgrading by Fitch Ratings

The Government has disputed the downgrading by Fitch Ratings saying it fails to recognize the robust policy framework of the new Government.

The Finance Ministry said that it observed with disappointment, today’s rating action by Fitch Ratings expressing concerns about Sri Lanka’s external debt repayment capacity over the medium-term, financing options and debt sustainability risks, at a time when the newly appointed Government has just announced its medium term policy framework in its Budget 2020.

“We do not accept this downgrade as it fails to recognize the robust policy framework of the new Government for addressing the legacy issues, including the concerns raised by Fitch Ratings, and ensuring ongoing economic recovery and macroeconomic stability of the Country,” the Finance Ministry said.

The Finance Ministry also said that it is surprising to note that Fitch Ratings’ assessment has ignored several key proposals presented in the Government Budget 2021 with regard to deficit financing in the period ahead.

“As indicated in the Budget 2021, the Government has adopted a novel approach in relation to foreign financing while enhancing the effectiveness of already secured financing channels, aimed at reducing the share of foreign financing of the budget deficit over the medium term,” the Finance Ministry said.

The Finance Ministry noted that Fitch Ratings builds up its argument based on the ‘existing financing model’, thus adopting a backward looking approach.

“In contrast, the forward looking financing model of the Government, which is skewed heavily towards domestic financing and will capitalize on the benefits of increased domestic savings and the low interest rate regime already in place given subdued aggregate demand conditions and well anchored inflation expectations. It is also noteworthy that the low interest rate regime will improve economic growth prospects in the period ahead, alongside the incentives being offered for capital investment, thereby supporting the envisaged debt consolidation efforts significantly,’ the Finance Ministry said.

The Finance Ministry said that as the relative share of outstanding foreign debt has already fallen to 44 per cent as per the latest available data, projecting a rise in foreign debt servicing obligations in the period ahead cannot be corroborated with facts.

The Finance Ministry also said that Foreign Direct Investments, which slowed in the first half of the year, appear promising in the period ahead, particularly with the expected inflows to the Colombo Port City project and for new manufacturing projects in industrial zones, including Hambantota.

“The new legal framework conducive to promote commercial services and investment in Port City will be presented to the Parliament in January 2021. The first phase of the Port City project is scheduled to begin in 2021, boosting economic activity and attracting sizable non-debt creating financial flows to the country,” the Finance Ministry added.

The Government says it is puzzling why Fitch Ratings downgraded Sri Lanka when the well-articulated policy framework presented in the Budget 2021 is receiving wider commendation for consistency and continuity, with a clear medium term view of fiscal consolidation on a realistic economic footing.

“Such action simply demonstrates the prejudicial approach of Fitch Ratings, and lacks due consideration to alternative strategies that the Government is committed to embark on in the period ahead. Practices of this nature by an international rating agency without a constructive engagement with the Government on the promising alternative, policy approaches are likely to make the agency concerned completely irrelevant as the country rises strongly in the period ahead,” the Finance Ministry said.

The Government of Sri Lanka also reaffirmed to foreign investors that have put faith in Sri Lanka continuously over the past several years that Sri Lanka remains willing and able to meet its debt obligations, as it has done impeccably in the past. (Colombo Gazette)

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