Sri Lanka claims it has officially ended debt default as Fitch upgrades credit rating to CCC+

As Fitch Ratings upgraded Sri Lanka’s credit default rating from CCC- to CCC+, the previously dollar-strapped nation officially ended its debt default, the country’s Finance Minister said.

“The risk of another default on local currency debt has been reduced by the completion of the international sovereign bond restructuring and an improved outlook for macroeconomic indicators,” Hong Kong-based Fitch Ratings said as it upgraded Sri Lanka’s long-term credit default rating on Friday.

“December 20 marked a major milestone in our economic recovery process as Sri Lanka officially exited sovereign default,” commented Mahinda Siriwardana, a top bureaucrat at the Sri Lankan Ministry of Finance.

Sri Lanka’s debt crisis

Sri Lanka plunged into an economic crisis when it declared sovereign default in April 2022, its first since gaining independence from Britain in 1948. Almost civil-war-like conditions and months of public protests led to the fleeing of the then-president Gotabaya Rajapaksa.

IMF bailout

Ranil Wickremesinghe, who then took over as president, began negotiations with the International Monetary Fund (IMF) soon after. His government clinched a bailout a year later in March 2023.

Siriwardana said the crisis was man-made and could have been averted if the early warnings had been heeded with an early engagement with the IMF.

“While macroeconomic outcomes have indeed been satisfactory and the debt restructuring process is completed culminating in this rating upgrade, people still feel the pain from the crisis and the difficult remedial measures,” he added.

He was perhaps referring to the time of unprecedented forex crisis that had triggered shortages of essentials and long queues were witnessed for fuel and cooking gas while the island faced power cuts for over 10 hours in 2022.

Siriwardana stresses there is no room for a repeat of policy errors, adding that while collapse happens rapidly, recovery is painful.

“This is indeed a historic moment and a time to celebrate but it is a moment that should never be repeated.”

Siriwardana was one of the two top officials besides the Central Bank Governor Nandalal Weerasinghe, who saw through the recovery process from its start in 2022.

There have been three presidents and three finance ministers since the country was plunged into crisis.

Earlier on Wednesday, President Anura Kumara Dissanayake announced that Sri Lanka achieved flexibility with the IMF on its rigid state revenue tax regime, something that was part of his election promise.

Speaking about the agreements reached with the International Monetary Fund (IMF) during its third review of the $2.9 billion Extended Fund Facility (EFF), Dissanayake, who is also the Minister of Finance, told the parliament that his government has been able to raise the tax threshold.

“We have been able to raise the tax threshold of pay as you earn (PAYE tax) so that those who have bigger incomes pay more while those who earn pay less,” Dissanayake said, adding there would be other VAT exemptions and withholding tax on interest incomes for the retired.

Dissanayake’s government recently concluded its third review of the IMF bailout and is awaiting the fourth tranche of the nearly $3 billion facility.

Debt restructuring

Sri Lanka on November 26, announced that it has ratified the agreement for debt restructuring for $14.2 billion, compulsory to maintain debt sustainability by the IMF through an exchange of new bonds for the existing bonds.

A week prior to it, the National People's Power (NPP) government got the IMF approval for a staff-level agreement to secure the fourth tranche of the nearly $3 billion bailout package, something that President Dissanayake backed despite his pre-presidential election rhetoric to renegotiate with the global lender to water down tough conditions.

The NPP was highly critical of the cost recovery-based utility tariffs and high taxes, which came conditional to the bailout.

The debt restructuring agreement was inked in the last week of then-President Ranil Wickremesinghe's regime in September, days before the presidential polls.