Hot on the heels of Moody's downgrading the outlook on Sri Lanka; the Central Bank (CB) expressed its displeasure over the rating action by the international rating agency and said it actually warrants an upward revision given the constructive policy measures taken by the authorities.

“…changing the outlook on Sri Lanka's B1 foreign currency sovereign rating from ‘Positive' to ‘Stable', is ill-advised and backward looking and is not a proper reflection of the external position and the recent improvements in the Sri Lankan economy,” the CB was prompt to respond.

Moody’s change of stance on Sri Lanka was triggered by inadequate improvement in the external payment position in the past two years and the slowdown in the pace of fiscal consolidation process. The CB said Moody’s assertion on the official international reserves remain ‘below peak’ level achieved in July 2011 (US $ 8.1 billion) and its claim that the commercial banks’ net liability position doubled during July 2011 and February 2013 (to US $ 3.4 billion) disregards several obvious factors that an impartial analysis would have clearly revealed. “The import cover of official reserves and total reserves (including commercial bank assets) in July 2012 stood at 4.2 months and 5.2 months respectively; while in May 2013, these figures have risen to 4.3 months and 5.4 months, respectively. Further, the reserve cover for short-term liabilities has improved steadily during the last year,” the statement released by the CB said.

Further, the CB said Moody’s had ignored the maturity profile of net liabilities of the commercial banks in making its assessment. The CB also brushed off any new additional pressure on Sri Lanka’s external payment position pointing out that several commercial banks have raised medium to long-term funds from foreign capital markets.

The CB pointed out the healthy inflows in tourism, remittances and the portfolio inflows to the Colombo Stock Exchange to demonstrate the country’s satisfactory external sector. However, last week saw the April trade deficit widening to 19.2 percent due to faltering exports and increasing to imports.

Responding to Moody’s assertion of slow pace of fiscal consolidation, the CB highlighted the government’s strong commitment towards reducing the deficits, which declined from 9.9 percent of the GDP in 2009 to 6.4 percent in 2012.

The CB also pointed out the marginal increase in debt to GDP ratio to 79.1 percent in 2012 from 78.5 percent in 2011, due to rupee depreciation.

“Further, the financial conditions of major stateowned enterprises have improved, mainly due to market-based price adjustments being made to consolidate the fiscal position further. These developments show that Sri Lanka is on a clear path of fiscal consolidation and hence, Moody’s statement that there is a “slowdown in the pace of fiscal consolidation”, is not justifiable.”

“Therefore, Moody’s change of Sri Lanka’s rating outlook from ‘Positive’ to ‘Stable’ is a contradiction of its own assessment in June 2012,” the CB said.

(DK)