Sri Lanka claims it has officially ended debt default

Colombo: With the decision by the Hong Kong based Fitch Ratings to upgrade Sri Lanka’s credit rating, the island nation has officially ended its debt default, the Finance Ministry said here on Saturday.

Fitch upgraded Sri Lanka’s long term credit default rating to CCC+ from CCC- on Friday as it said that “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.”

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

Sri Lanka had plunged into an economic crisis when the island nation declared sovereign default in mid-April of 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.

Ranil Wickremesinghe, who then took over as the president, began the negotiations with the International Monetary Fund (IMF) soon after. His government then clinched the 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 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 that no room exists for a repeat of policy errors, the collapse happens rapidly but the 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 has 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 USD 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 has recently concluded its third review of the IMF bail out and is awaiting the fourth tranche of the nearly USD 3 billion facility.

Sri Lanka had on November 26 announced that it has ratified the agreement for debt restructuring for USD 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 USD 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 bail out.

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