COLOMBO (Reuters) – Sri Lanka ruled out an IMF bailout on Wednesday and planned more lending, including from China, to deal with the deepening economic crisis, but was quickly hit by another downgrade international.
Hours after Colombo announced it was in talks with Beijing for a large loan from China, the island’s largest bilateral lender, S&P Global downgraded Sri Lanka a notch to CCC against CCC +. The island’s tourism-dependent economy has been hit by the pandemic, with supermarkets rationing goods and power outages imposed by electric utilities unable to finance oil imports.
S and P Global said the downgrade reflected Sri Lanka’s worsening ability to maintain foreign exchange reserves and the higher risk of sovereign default.
“Timely debt servicing is likely to become increasingly difficult over the next 12 months, given Sri Lanka’s vulnerable external profile, sizable budget deficits, high public debt and high interest payments.” S and P said in a statement.
Other international rating agencies have also warned of an impending sovereign default on Sri Lanka’s $ 35 billion foreign debt as the Treasury tackles the shortage of foreign exchange reserves.
Sri Lanka calls for Chinese debt rescheduling amid collapsing economy
But central bank governor Ajith Nivard Cabraal has rejected growing calls from local and international economists to call for an International Monetary Fund bailout and debt restructuring.
“The IMF is not a magic wand,” he told a press conference in Colombo. “At this point, the other alternatives are better than going to the IMF.”
Cabraal added that talks with China over a new loan were at “advanced stages” and that a new agreement would service the existing debt to Beijing.
“They would help us make the repayments (…) the new loan from China is intended to amortize our debt repayments to China itself,” he said.
Beijing is already the island’s largest bilateral lender, accounting for at least 10 percent of Sri Lanka’s external debt excluding loans to Sri Lankan state-owned enterprises.
Cabraal’s remarks come days after a visit by Chinese Foreign Minister Wang Yi who discussed debt payment restructuring with President Gotabaya Rajapaksa.
Sri Lanka has borrowed heavily from China for infrastructure in the past, some of which ended up like white elephants.
Unable to repay a $ 1.4 billion loan to build a port in the south, Sri Lanka was forced to lease the facility to a Chinese company for 99 years in 2017.
The United States and India have warned that the Port of Hambantota, located along vital east-west international shipping routes, could give China military hold in the Indian Ocean.
Cabraal did not give an indication of the amount of the loan requested from China, but said talks were also underway with India for a billion dollar line of credit to finance a wide range. imports.