Moody's has placed Sri Lanka's “Caa1” foreign currency long-term issuer and senior unsecured debt ratings under review for downgrade, the global rating agency confirmed in a statement, citing fragile external liquidity position and increasing risk of default. 

The move also showed the Sri Lankan government’s weakness to address significant and urgent risks to the balance of payments. In the last few months, the government increasingly relied on securing funds from bilateral sources, mainly China. 

However, Moody’s in its assessment said Sri Lanka’s financing options remain narrow with borrowing costs in international markets still prohibitive. It also assessed that the government’s foreign exchange reserve would continue declining from already low levels. 

This will further erode its ability to meet sizeable and recurring external debt servicing needs, and increasing the balance of payment risks, the agency said in the statement released on Monday. 

It has extremely weak debt affordability with interest payments absorbing a very large share of the government's very narrow revenue base. This compounds the debt repayment challenges.

Hours after the statement, Sri Lankan Finance Ministry released a statement, calling the move “ill-judged and unacceptable”. The Ministry said they have funds lined up to repay foreign debt and the sovereign bond maturity in May. 

“Moody’s action could create uncertainty among investors who have kept faith in Sri Lankan ISBs and other investments,” the ministry said in a statement. It further added, “As experienced in the past, such undue uncertainty created by the rating agency could lead to price volatilities in the market for ISBs and for other investments.”

Amid the deepening foreign reserve exchange crisis, Sri Lanka is likely to face a gas shortage in the coming days as the LAUGFS Gas PLC, one of the largest suppliers of LP Gas in the country, plans to dramatically cut its import, citing difficulties in getting letters of credit from banks. 

U.K. Thilak De Silva, the chairman of the firm, cited two reasons for import cuts: continued losses and difficulties in getting dollars from banks. He also said their request for the increase in prices--for balancing the rising global prices-- wasn’t heeded by the government. 

The heart of the crisis lies in the failure of successive governments to address the price gap, he said, referring to the last two administrations. Currently, the firm is losing around $3.78 per gas cylinder and accumulated over 26 million in losses.  

“In addition, there is a severe shortage of foreign currency with the banks,” De Silva was quoted as saying by Daily Mirror newspaper. 

Sri Lanka has been facing one of the worst forex crises of its history, forcing the government to cut down its imports and regulate the dollar payments. Additionally, the Central Bank, in the past few months, has excessively printed banknotes and increased loans to boost demand. 

Meanwhile, the country dollar income showed no sign of recovery, which in turn dragged down the valuation of its currency and further deepened the balance of payment crisis. In the last few months, the government cut imports ranging from fertilizers, rice to automobiles. 

(SAM)