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Police establish election operation rooms ahead of Presidential Polls

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July 29, Colombo (LNW): In preparation for the upcoming presidential election, Election Operation Rooms will be established at all police stations and divisional police areas, a report by Daily Mirror disclosed.

These rooms will be overseen by the respective divisional police officers and the senior DIG in each area.

The operation rooms will be responsible for handling complaints related to election violence and violations of election laws.

Additionally, a dedicated police unit has been set up at Police Headquarters, already operational under the supervision of an SSP.

SDIG Asanga Karavita, along with another DIG and a Senior Superintendent of Police (SSP), has been assigned to oversee election-related duties.

SDIG Karavita is coordinating with the Election Commission regarding the upcoming poll.

A Senior Superintendent of Police (SSP) will coordinate activities at the district level.

Despite the absence of an Inspector General of Police (IGP), the Election Commission is authorised by the Constitution to issue directives to the police once an election is declared.

CAA warns of imposing bread price controls amidst overpricing concerns

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July 29, Colombo (LNW): The Consumer Affairs Authority (CAA) has issued a warning to bakery owners, indicating that a regulated price for bread will be introduced next week if a 450g loaf is not sold at a maximum retail price of Rs. 130.

Sanjaya Irasighe, CAA Raids and Special Investigations Director, said concessions on electricity and fuel have been provided, and these savings should be passed on to consumers by pricing bread at Rs. 130.

“Previously, the retail price of a loaf of bread was Rs. 140. Following price reductions, it should now be Rs. 130. However, some areas are selling bread at Rs. 140, which is unacceptable. The retail price should be uniform at Rs. 130,” he emphasised.

The CAA has communicated through the media that traders and bakeries must adhere to this pricing.

Inspections will be conducted this week, and if prices are not adjusted, the CAA will impose a controlled price next week.

Non-compliance will result in fines: Rs. 100,000 for small bakeries and between Rs. 500,000 and Rs. 5 million for larger establishments.

Irasighe urged bakery owners to transfer the benefits of reduced fuel and electricity costs to consumers rather than prioritising profit.

If necessary, the CAA will investigate and set a price based on production costs and a reasonable profit margin.

Vehicle import restrictions to ease in August: Finance State Minister

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July 29, Colombo (LNW): State Minister of Finance Shehan Semasinghe has announced that vehicle import permissions will commence in August.

Initially, the focus will be on granting approval for vehicles essential for business and transportation purposes.

Semasinghe stated that while the government has previously lifted many import restrictions, vehicle imports remained restricted.

In August, the government will begin a phased removal of these restrictions, starting with vehicles necessary for commercial activities and transport.

Permissions for private vehicle imports are anticipated in the first quarter of 2025.

Politics of policy interest rates – Is MPB competent? Public to pay?

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Article’s Background

The Monetary Policy Board (MPB) of the Central Bank (CB) at its meeting held on 24 July at 7.00 am as announced decided to reduce policy rates by 25 basis points to 8.25% (standing deposit facility rate-SDFR) and 9.25% (standing lending facility rate-SLFR) (Read the MPB policy statement here).

I predicted on 21 July that the MPB would cut policy rates at least by 100 bps in consideration of the present set of data flow relating to the stabilization of the economy with inflation being close to zero and support the government for the pending Presidential Election. Such a rate cut is a valuable item of information for the government to justify the stability of the stabilization. I also predicted that the MPB could even keep policy rates unchanged and provide a policy story to support its (read the article here).

However, the MPB cut rates by 25 bps and provided a just story unrelated to inflation path or the price stability.

Therefore, this article is to reveal that the MPB does not have a conceptual or practical perception to conduct the policy rates-based monetary policy in the current context.

Inflation target in the monetary policy framework agreement (MPFA) with the Minister

  • The MBP first time disclosed the statutory inflation target as 5% based  on CCPI over the medium-term. This is incorrect.
  • As per MPFA (Read the Gazette here), the target is 5% on quarterly average of the year-on-year CCPI monthly headline inflation for the three months of the corresponding quarter, with a margin up to 2%. This means that the MPB has to comply with the target on a quarterly basis (three months moving average) for the past. Therefore, the MPB statement the public by hiding facts.
  • As per MPFA , the MPB can tolerate a quarterly inflation of 3% to 7% in any quarter. This is an unjustifiably high variation. One cannot imagine a quarterly average inflation of 7% continuing for few quarters in the economy as being legitimate with the presence of monetary policy. Therefore, such a high range of permitted inflation casts doubts on the competence of the MPB to maintain the domestic price stability as set out in law.
  • Quarterly average inflation has been considerable higher than the year-on-year inflation in the most part of the period since early 2023 of the present rate cutting cycle. Therefore, the MPB has the space to operate with a inflation outlook of a higher magnitude.
  • Quarterly average inflation target is nothing but simple algebra. It does not represent actual price levels consumers confront in reality. All central banks follow a simple year-on-year inflation target on the inflation path. Therefore, the MPB’s monetary policy is just data point dependent. The European Central Bank President at the last press conference held on 18 July stated its its monetary policy was not dependent on data points but the path or flow of data.
  • The date of the gazette of the MPFA is 3 October 2023. However, the MPB communicated the inflation target as envisaged inflation of 5% over the medium-term in all policy statements including it on 5 October 2023. The MPFA does not refer to maintenance of inflation at 5% over the medium-term. It is for the past on a quarterly average basis. Therefore, the MPB has misled the public.
  • As per section 26(3) of the Central Bank Act, the gazette should contain both inflation target and other parameters relating to the target. However, no parameters are contained in the gazette. Therefore, the public cannot know the economic rationale behind the inflation target. In this regard, relevant senior officials of the Ministry have not educated the Minister to incorporate those parameters. The inflation target cannot come from the heaven.
  • As per section 26(5) of the Central Bank Act, the MPB should submit a report to the Parliament if the CB fails to meet the target by the margin of more than 2% for two consecutive quarters. Accordingly, the MPB has failed in quarters ending April, May and June this year and October and November last year. However, the public is unaware whether the report was submitted to the Parliament.
  • The policy statement states that the deviation of margin during the second quarter 2024 is blow 2%. However, data show that it is more than 2% for three months ending April (-2.2), May (-3.9) and June (-3.6).

In view of points made above, the present monetary policy framework does not have a macroeconomic purpose and public accountability for the domestic price stability.

Questionable contents in the policy statement

I present following contents of the policy statements to establish further that the MPB is incompetent in managing the monetary policy in the present bankrupt and contracted economy.

  • Need to signal its desire to continue eased monetary conditions to sustain the revival of economic activity towards the full potential.

This is inappropriate as the CB has no mandate to consider or target the supply side of the economy. Its only mandate is the domestic price stability. The underlying monetary theory is the demand management through controlling the credit and money. The present policy formular is the policy rates and over-night inter-bank rate.

Further, the monetary policy cannot be labelled as tight or eased at particular time because policy interest rates are set to suit the present or expected credit/financial conditions of the economy in line with the inflation target.

  • The economy operates below its full capacity presently and the forecast to reach its potential over the medium term horizon.

This is not acceptable as supporting economic data are not given although the monetary policy is data dependent. The MPB does not have research to establish the full capacity and potential of the economy in figures. These are supply side subjects. Further, it has no mandate to cater to capacity and potential as its does not have a duel mandate, i.e., price stability and high growth/employment, as in the case of many central banks.

  • Reference to downward revision of electricity tariff, fuel and LP gas prices for considerably below-target headline inflation.

Monetary policy should not consider individual price developments to explain inflation. The current monetary policy framework is the demand management by movements of policy rates. Therefore, the MPB should analyze how low inflation was resulted by policy interest rates and interest sensitive demand sectors.

  •  Headline inflation is likely to be notably below the target in the forthcoming months due to the combined impact of downward adjustments to electricity tariffs and domestic fuel prices and the statistical base.

This is inappropriate as it does identify the impact of the demand side in forthcoming months. A man on the road knows that inflation will come down as the government impalements price policy actions pending the election. The statistical base is not a factor determining prices and actual inflation. 

  • The external current account is likely to have recorded a surplus in the first half of the year.

No date is provided to show how the surplus will affect the the quarterly inflation or its outlook.

  • Lending interest rates, other than on prime lending, remained weaker than the adjustments to deposit interest rates.

This is just a statement unrelated to inflation outlook. It is a simple fact that deposit rates adjust frequently as they are short-term liabilities than lending products.

  •  Inflation forecast is neither a promise nor a commitment.

Therefore, inflation forecast is not accepted even by the MPB. Further, the forecast is not for average inflation for the quarter basis for each three months, which is used for monetary policy target. The forecasts published in the past policy statements are significantly different to each other.

In a recent review of the Bank of England inflation forecasting by the former Fed Chainman Professor Ben Bernanke, it is now agreed that the forecasting is highly defective. The Bank of England has been the most accredited inflation forecaster for the monetary policy. The same is now accepted as the position for the Fed inflation forecasting. 

Therefore, economist believe that central banks cannot forecast anything more than a month or a quarter. The MPB does not explain reasons why inflation forecast for 2026 is in a wide range of negative 5% to 15%. All central banks failed to forecast the present wave of inflationary pressures despite all those technical forecasting methods.

General concerns

  • With a high level of liquidity in the present banking system, a policy rate cut is not justified.
  • Despite the liquidity surplus, the CB provides further liquidity through regular reverse repo auctions throughout the period from January 2023.
  • Banks are inclined to park the excess liquidity at the SDFR while not borrowing on SLFR.
  • Market rates quickly adjust to policy rates (call money, market repos and Treasury bills). However, past data on adjustments of market volumes whether they respond to policy rates or correlate with inflation are not available.
  • Sri Lankan monetary system is about 8% of fractional reserve system (reserve money in percent of broader money stock) as compared to 27% in the US. It is only 4% when the wider financial system is considered. Therefore, changes in policy interest rates or reserve operations do not seem to have any significant impact on credit and financial conditions. Data show that banks now tend to borrow/lend exiting reserves within the banking system without resorting the fresh reserves through the CB.
  • Year-on-year inflation has been close to zero for the past three months and fast falling since early 2023.The CB as well as others predict further decline in inflation in coming months, consequent to govt price policies pending the Presidential election and statistical base effects. However, prices or cost of living does not decline.
  • Therefore, the MPB is mandatory to cut policy rates in a significant amount to maintain the domestic price stability in coming months by boosting the demand across the economy. However, 25 bps cut is the return to the old policy game for not taking any macroeconomic risks. Recently, the Governor of Swedish Central Bank stated that the preparation of months through meetings and research for a rate change of few basis point was useless and a significant change should be made at once if the underlying economic problem is clear.
  • Therefore, 25 bps cut means that the MPB has saved the policy space for another rate cut nearing the Presidential election to support the government. Everybody knows that the brand new independence of the CB has lost at its infancy as the Parliament did not allow the CB Governing Board to implement its independent decision on the salary hike in February.
  • Policy rates are risk-free interest rates determined arbitrarily by the MPB without any economic rationale supported by data. Inflation target is also set arbitrarily. However, market interest rates are risk prices based on various risk perceptions by lenders and investors. Accordingly, any interest rate is effectively the sum of pricing of risks such as credit, tax, exchange rate, domestic prices and other market uncertainties expected in the future. Therefore, the MPB has no economic basis to assume that all market interest rates, prices, inflation and the real economy will move in desired direction when ever it decides policy rates. At least, if the MPB has empirical research as to how various risk components determine interest rates at different market layers, there can be some confidence on the MPB policy process. Therefore, policy rates cannot exhibit magical powers and transmission as the the policy statement routinely envisages. 
  • In view of observations made above, the present monetary policy framework provides no tangible economic benefits to the public. It only helps printing money/reserves to a set of wholesale money dealer banks to manage their liquidity positions lavishly on a daily basis for commercial targets. The MPB is not worried about credit and liquidity distribution for economic activities across the country or sectors to recover from the wide-spread bankruptcy. This is the direct result of the new Central Bank Act that the general public has to pay for.
  • Therefore, the present monetary policy framework as announced in the MPFA is only a statistical exercise to those who believe it without any question raised on its relevance to the real economy.

Following charts show recent monetary and money market trends and the quick response to the last 25 bps rate cut.

This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures. All are personal views of the author based on his research in the subject of Economics which have no intension to personally or maliciously discredit characters of any individuals.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 12 Economics and Banking Books and a large number of articles published.

Source: Economy Forward

Postal Dept submits Rs. 1.4 bn estimate for election expenses

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July 29, Colombo (LNW): The Postal Department has submitted an estimate of Rs. 1.4 billion to the Election Commission for anticipated expenses related to the upcoming presidential election.

Deputy Postmaster General Rajitha Ranasinghe disclosed this information this morning.

He explained that the estimate encompasses a range of costs, including standard postal fees, registered mail charges, stationery, transportation, and administrative expenses.

Ranasinghe noted that this is a preliminary estimate and the final requested amount may be subject to adjustment.

Severe weather warning issued for heavy showers, strong winds and rough seas (July 29)

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July 29, Colombo (LNW): Showers will occur at times in Western and Sabaragamuwa provinces and in Galle, Matara, Kandy and Nuwara-Eliya districts, the Department of Meteorology said in its daily weather forecast today (29).

Fairly heavy showers above 50 mm are likely at some places.

Several spells of showers will occur in North-western province.

Strong winds of about (50-55) kmph can be expected at times over Western slopes of the central hills and in Northern, North-central and North-western provinces and in Trincomalee, Monaragala and Hambantota districts.

Fairly strong winds about (30-40) kmph can be expected at times elsewhere of the island.

Marine Weather:

Condition of Rain:
Showers will occur at times in the sea areas off the coast extending from  Puttalam to Matara via Colombo and Galle.
Winds:
Winds will be westerly to south-westerly and wind speed will be (30-40) kmph. Wind speed can increase up to 60 kmph at times in the sea areas off the coasts extending from Kankasanthurai to Puttalam via Mannar and from Hambantota to Pottuvil. Wind speed can increase up to 50 kmph at times in the sea areas off the coasts extending from Trincomalee to Kankasanthurai via Mullaittivu and Puttalam to Hambantota via Colombo and Galle.
State of Sea:
The sea areas off the coasts extending from Kankasanthurai to Puttalam via Mannar and from Hambantota to Pottuvil can be rough or very rough at times. The sea areas off the coasts extending from Trincomalee to Kankasanthurai via Mullaittivu, and Puttalam to Hambantota via Colombo and Galle can be fairly rough at times. Naval and fishing communities are requested to be attentive in this regard.

Central Bank adopts Parliament’s Contentious Salary Proposals

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By: Staff Writer

July 28, Colombo (LNW): The Central Bank confirmed yesterday that it is proceeding with salary revisions as directed by the committee and Parliament.

“We are in the process of implementing all the recommendations in the report, following its endorsement by an independent committee and the Committee on Public Finance (CoPF),” Central Bank Governor Nandalal Weerasinghe stated during the post-Monetary Policy Review meeting media briefing.

The decision to implement substantial salary increases for CBSL staff has sparked concerns amid debates over the autonomy of the Central Bank and the implications of recent legislative changes.

In February, the Governing Board of the CBSL asked Governor. Weerasinghe, in accordance with Section 80(2)(b) of the Central Bank of Sri Lanka Act No. 16 of 2023, to formally request the Finance Minister to seek an opportunity to brief Parliament through an appropriate committee on the rationale and process behind the recent revision of remuneration for CBSL staff. This request followed a meeting on 21 February, where the issue was discussed in detail.

The salary revisions, approved by the Governing Board under a triennial collective agreement with trade unions covering 2024-2026, have been highly controversial.

On 6 March, CBSL officials were summoned before Parliament to justify the significant salary hikes, which have drawn sharp criticism from MPs

. During the party leaders’ meeting on the issue, MPs condemned the move as a violation of the law, arguing that the CBSL lacked the legal authority to unilaterally increase salaries without prior Parliamentary approval. They also highlighted the additional monthly expenditure of Rs. 232 million resulting from the hikes.

Critics, including MPs, have pointed out the moral contradiction of the Central Bank increasing its employees’ salaries while simultaneously introducing policies that raise taxes such as PAYE and VAT for other segments of the workforce.

On 1 April, the President, in his capacity as the Finance Minister, appointed an Independent Remuneration Committee to review the salary increases. The committee, chaired by Dinesh Weerakkody, included Arjuna Herath, Dr. Indrajit Coomaraswamy, Sudharma Karunarathne, Anthony Nihal Fonseka, Anushka S. Wijesinha, and Duminda Hulangamuwa.

On 19 June, CoPF Chairman Dr. Harsha de Silva informed Parliament that the report from the Independent Remuneration Committee, appointed by President Ranil Wickremesinghe to review the salary increases, was received, and the report indicated that the salary increases should not have been implemented.

RAMIS under goes system change to streamline tax administration 

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By: Staff Writer

July 28, Colombo (LNW): The Inland Revenue Department (IRD) is set to reactivate the currently dysfunctional Random Access Management Information System (RAMIS) by December this year, involving a redesign and software upgrade, as disclosed by finance ministry sources.

The reactivation aims to address the original design’s unintended consequences, which increased discretion and interaction between revenue officials and taxpayers, leading to misallocation of IRD resources, according to a senior IRD official. Efforts are underway to review and streamline the various business processes RAMIS was designed to automate.

Enhancing the online filing experience is a relatively quick and cost-effective task. Implementing this could support a policy requiring electronic tax return filing for all taxpayers, reducing interactions with IRD officials.

The new system is intended to curb fraudulent practices by tax evaders and corrupt officials, as well as identify those not properly fulfilling their revenue collection duties, revealed the President’s Chief of Staff.

RAMIS is expected to be fully automated, eliminating manual processes to prevent the accumulation of default taxes.

The agreement with the Singaporean company developing and maintaining RAMIS expires on January 31, 2024. However, the IRD has not developed sufficient internal capacity, including human resources, to fully manage RAMIS by that time.

President’s Chief of Staff, Sagala Ratnayake, has instructed the relevant departments to reactivate the system software within two months to support the 2024 budget process.

A Public-Private Partnership (PPP) is recommended to involve a private entity in running and maintaining the back office of RAMIS, creating a mutually beneficial arrangement.

A report from the Cabinet Sub-Committee, assigned to investigate and recommend the effective utilization of RAMIS, was recently presented to President Ranil Wickremesinghe.

 Finance, Minister Wickremesinghe issued a Cabinet Memorandum on obtaining maintenance services for RAMIS on April 8, 2024, following a Cabinet decision. The sub-committee, chaired by Power and Energy Minister Kanchana Wijesekera and including Ministers Tiran Alles and Nalin Fernando, prepared the report with seven main recommendations emphasizing the urgency of effectively utilizing RAMIS.

Key recommendations include:

Initiate an Expression of Interest (EOI) process to identify suitable partners for managing RAMIS.

Develop and implement a comprehensive takeover plan before the current maintenance contract with Singapore Corporation Enterprises (SCE) expires.

Prioritize clearing the system backlog from the 2019/2020 assessment year onwards and report progress monthly to the Council of Ministers quarterly.

Use the National Identity Card (or a future alternative) exclusively for identifying individuals for tax collection.

Integrate RAMIS with a Connected Government Framework linking various government institutions.

Simplify the tax revenue collection process by developing a user-friendly portal with enhanced user experience and streamlined online communication.

Prioritize amending laws and regulations to implement the recommended tax policy changes.

National Sustainability Standard for Ceylon Tea by End of 2024

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By: Staff Writer

July 28, Colombo (LNW): The Ministry of Agriculture and Plantation Industries of Sri Lanka, led by Mahinda Amaraweera, has announced plans to establish a National Sustainability Standard for Ceylon Tea by the end of 2024.

This initiative, unveiled during a two-day convention attended by representatives from leading tea brands and social organizations worldwide, aims to enhance the country’s position in the global tea industry while addressing critical issues such as climate change and the welfare of plantation workers and smallholder farmers.

Amaraweera emphasized the significance of this new standard, which will promote a regenerative agriculture model with a focus on low-carbon tea production.

 The initiative will be grounded in rigorous life cycle analysis to ensure that the tea production processes are both environmentally sustainable and economically viable. He highlighted the importance of global collaboration to secure the future of Ceylon Tea amidst the industry’s evolving challenges.

He made this announcement at a convention, organized by the Colombo Tea Traders Association and supported by the Sri Lanka Tea Board, serves as a vital platform for stakeholders to discuss strategies for sustaining the tea industry in light of changing consumer preferences and environmental demands.

Amaraweera acknowledged the dedication of the organizing committee and industry stakeholders in shaping a sustainable future for tea, stressing the importance of collective action in advancing the industry.

The tea industry is crucial to Sri Lanka’s economic development, providing direct and indirect employment to around one million people and supporting the livelihoods of poor communities in estates and remote rural areas.

 At the farm level, tea serves as a cash crop, generating income for both farmers and workers, which helps pay for essential needs such as food, schooling, and healthcare.

Despite a decline in its relative importance due to the rapid growth of non-agricultural sectors, tea remains vital in terms of its contribution to national output, employment, and net foreign exchange earnings

Black tea accounted for 12.3% of Sri Lanka’s total export earnings. Ceylon Tea, known for its premium quality, is grown in the highlands of Sri Lanka and holds a significant position in the global market. The country is the fourth largest tea producer in the world, contributing to 6.5% of global production.

The global tea industry faces numerous challenges, including declining productivity in major tea-producing countries like Kenya, India, and Indonesia. 

Factors contributing to low productivity include inadequate replanting, inconsistent fertilizer applications, aging tea bushes, soil erosion, high wages, lack of worker training, and poor living and working conditions. Additionally, the tea industry is affected by climate change, which impacts the quality of tea produced.

Sri Lanka nears to rating agencies’ determination on solvency status: CB governor

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By: Staff Writer

July 28, Colombo (LNW): Central Bank expressed optimism this week about the imminent conclusion of all types of debt restructuring and the start of debt repayment, which he believes will remove Sri Lanka from its ‘default’ status assigned by global rating agencies.

Although different rating agencies have various methods for assessing sovereign credit ratings, this move is expected to restore Sri Lanka’s access to international capital markets for further borrowing, Governor of the CB Nandalal Weerasinghe said.

“The basic principle is for a sovereign to return to a normal repayment schedule after debt restructuring, which will effectively remove the ‘default’ label, he claimed adding that .he is  confident we will achieve this soon,.

He was speaking ar a media briefing following the monetary policy meeting on Wednesday.Following the government’s debt agreements with bilateral creditors in June, Sri Lanka gained access to bilateral credit. For example, Japan, one of Sri Lanka’s largest bilateral creditors, resumed development funding this week.

Sri Lanka is anticipated to receive up to $75 million from Japan in the next few weeks, with a commitment to access $1.1 billion over the next six years.

Similarly, after the Sri Lankan government and bondholders agreed in principle to restructure about $12.5 billion in defaulted bonds, pending approval from bilateral creditors and the International Monetary Fund, there is hope that Sri Lanka’s credit rating will improve.

Sri Lanka’s sovereign credit rating was downgraded to restrictive default and selective default status after the country declared it would default on most foreign currency liabilities in April 2022. This decision was made by the current Central Bank Governor and Treasury Secretary.

As Sri Lanka nears the completion of bondholder debt deals with generally favorable terms, rating agencies might lift the country out of default statuses, thereby restoring confidence in lending to Sri Lanka.

Rating agencies had been gradually downgrading Sri Lanka’s sovereign ratings since December 2019, as the previous government did not follow policies in line with the agencies’ expectations. Additionally, these agencies were unaware of the significant impact that unforeseen events, such as pandemics, could have on small economies like Sri Lanka.

Following the completion of three critical steps in its debt restructuring—finalising Domestic Debt Optimisation (DDO), signing agreements with the Official Creditor Committee and China Exim Bank, and reaching consensus with bondholders—Sri Lanka is now on track for a potential rating upgrade, Finance State Minister Shehan Semasinghe said.

He emphasised that while the next goal is a rating upgrade, the country must work diligently to achieve this and move past its current default status.