ICRA flags looming external sector crisis

• Tea prices crash adding to existing woes while SL already has a lot on its plate
• Says US $ 1bn ISB, due for settlement in July, likely to come from already depleted reserves  

ICRA Lanka Limited yesterday raised serious concerns about a looming crisis at the country’s external sector, amid continuous rise in the global oil prices, base metal prices and falling tea prices, a scenario which gets further exacerbated by the upcoming dollar outflows for settling foreign debt. 

The rating agency, a regular commentator on the economy, sounded alarm at the developing external sector crisis, which could spill into the real sector through higher consumer prices, as people already contend with the soaring prices on almost everything they purchase, at a time when their incomes have been significantly undermined as a result of the virus-related restrictions. 

“High oil and base metal prices combined with falling tea prices will further compound the external sector challenges,” ICRA Lanka said. 

“Fuel price hike and its spillover effect will force the inflation rate up,” it added. 

While the global commodities prices such as fuel and metal are rising on robust demand from advanced economies, the tea prices crashed in May, dealing a fresh blow to the Sri Lankan economy.

According to ICRA Lanka, the prices of tea in the Colombo auctions dipped by over 6 percent in US dollar terms. Tea is Sri Lanka’s largest agricultural 
export commodity. 

“We expect the US $ 1.0 billion International Sovereign Bond maturing in July to be serviced out of the reserves, which will put pressure on the reserve position of the country,” ICARA Lanka cautioned on the thinning external sector buffers of the country, ahead of the July 27 bond settlement coming due. 

Sri Lanka lost nearly half a billion dollars in May in its reserves to end up with a reserve position of US $ 4.0 billion, barely sufficient to cover three months of imports.