ICRA Lanka urges government to seek IMF assistance to prevent hard landing of economy

• Says external sector on brink of breaking point while country scrambling to finance its basic imports as commodities shortages persist

ICRA Lanka Limited asked the government to seek the assistance of International Monetary Fund (IMF) as the measures thus far put in place by the Central Bank and the government to alleviate the brewing foreign exchange crisis have been proven counterproductive and the six-month road map announced to ease the foreign currency liquidity crunch had made only a limited progress. 

Pointing out that the current external sector conditions in the country are on the brink of “ breaking point”, the Colombo based rating agency said the looming debt default would become, “catastrophic”, to the country which is already grappling with numerous other problems which have made daily living a nightmarish experience for a large majority.  ICRA Lanka, although has constantly been raising red flags in connection to the economy, it has never been more blunt than last week to forewarn the authorities and the country at large of the implications and its large scale reverberating effects on elsewhere in the economy from a, “looming default”, which now increasingly appears to be a likely scenario in the next few months.  “The external sector troubles of Sri Lanka are on the brink of breaking point”, said the rating agency last week prior to Fitch’ Ratings’ damning report which downgraded Sri Lanka’s sovereign credit rating further into speculative grade on the increasing probability of the government reneging on is debt commitments in the next few months.  

 “Given this scenario, Sri Lanka should consider an IMF assisted programme as the looming debt default would be catastrophic to the country”, ICRA Lanka added as the country is already scrambling to finance its day-to-day essential imports such as fuel, gas, milk powder and the likes as people are forced to eat less on soaring food prices as high as 20 percent. 

According to official consumer price gauge, Sri Lanka’s food prices rose by 17.5 percent and the overall prices rose by 9.9 percent from a year ago, recording the highest in at least in 10 years, but in reality the prices have climbed in several multiples in the last couple of months than what the official prices suggest.  The shortage in cooking gas is so acute that canteens, restaurants and other food outlets are forced to close doors to their patrons while the milk powder shortage has prompted certain small grocers in the city and the outskirts to stock pile 450 gram packs and sell them in small quantities of 50 grams and 100 grams to people around them at prices which are higher than their prorated retail price, providing an oasis to enrich the traders. Although the situations of shortages in these commodities have been brought into the attention of the authorities several times, they have been complacent and have continued to maintain that such imports are being supported continuously through direct sales of foreign exchange.   “The CBSL’s heavy handed approach in the forex market has been counterproductive and is unlikely to help to improve the situation”, ICRA Lanka said. 

“The steps taken so far, including the six month road map yielding very little progress, the country is left with an extremely narrow set of options to find a way out of the current crisis”, they added. Even though Sri Lanka may ride out its near term foreign debt settlement challenge with the assistance of some of the stop-gap measures currently in the works, the current economic hardships facing a large majority of its people are unlikely to abate next year, and instead could worsen due to persistent foreign exchange liquidity crunch and the elevated prices that could stay well into 2022.  

Meanwhile, the prospects for growth, which could assuage some of these pressures, remain elusive given the woefully low productive capacity of the Sri Lankan economy. 

Fitch Ratings put 2022 growth at 2.0 percent, lower than an estimated 3.6 percent growth for 2021.