By: Staff Writer
December 26, Colombo (LNW): On December 20, 2024, Sri Lanka achieved a major milestone in its economic recovery by officially exiting sovereign default. This accomplishment follows a period of painful reforms and complex debt restructuring, Treasury Secretary Mahinda Siriwardena announced.
He emphasized that Sri Lanka must adhere to key economic principles, regardless of political changes. These include fiscal discipline, sound monetary policies, and the stabilization of public finances to create fiscal space for development and honor commitments to both domestic and international stakeholders.
Encouragingly, there are early signs of the de-politicization of macroeconomic policy, a shift that Siriwardena believes will be further solidified by strong legal frameworks like the Central Bank of Sri Lanka Act, Public Financial Management Act, and Public Debt Management Act.
“This upgrade is a critical milestone,” Siriwardena said, “but it is only the beginning of Sri Lanka’s journey towards shared prosperity. To succeed, we must avoid repeating policy errors driven by dogmatic beliefs or unsustainable practices.”
Moody’s Upgrades Sri Lanka’s Credit Rating
Global rating agency Moody’s recently upgraded Sri Lanka’s Long-Term Foreign Currency Issuer Rating to Caa1 from Ca, with a stable outlook.
Previously under review for an upgrade, this decision reflects the successful restructuring of Sri Lanka’s international bonds held by private creditors, significantly reducing default risks on future issuances.
Moody’s noted that the new rating reflects improvements in Sri Lanka’s external vulnerability and government liquidity risks, as well as prospects for fiscal and debt sustainability.
These improvements are underpinned by ongoing reforms aligned with programs supported by development partners, including the International Monetary Fund (IMF).
The government’s ability and willingness to implement these reforms also highlight improvements in governance, which contributed to the rating action.
However, Moody’s warned that challenges remain. Despite the upgrade, Sri Lanka’s debt affordability remains weak, and its debt burden is high compared to peer nations, limiting fiscal flexibility. Additionally, the country faces significant social challenges that need attention.
The stable outlook reflects balanced risks. On the positive side, sustained reform implementation could further strengthen Sri Lanka’s credit profile, potentially leading to higher ratings.
On the downside, risks remain due to a narrow government revenue base, limited fiscal space, and reliance on external financing. Adverse global economic conditions could threaten sustained recovery and reform progress.
Progress on International Bond Restructuring
Concluding the review initiated on November 28, 2024, Moody’s has assigned definitive Caa1 ratings to Sri Lanka’s new USD-denominated Macro-Linked Bonds (MLBs), Governance-Linked Bonds (GLBs), and Past-Due Interest (PDI) Bonds. Additionally, the agency raised Sri Lanka’s local and foreign currency country ceilings to B1 and B3, respectively.
The upgrade highlights reduced external risks, increasing foreign exchange reserves, and improved macroeconomic stability. However, Moody’s noted that challenges such as high external debt and a fragile domestic political environment continue to pose risks.
Sri Lanka’s exit from default and the recent rating upgrade by Moody’s mark a new chapter in its economic recovery. Continued commitment to reforms and prudent policymaking will be crucial to achieving long-term stability and prosperity.
