Image: Sri Lanka was the first Asia-Pacific country in decades to default on foreign debt.
Treasury Secretary Mahinda Siriwardana on Saturday welcomed the sovereign rating upgrade by Fitch and said Sri Lanka has officially exited default status.
“20 December 2024 marked a major milestone in our economic recovery process as Sri Lanka officially exited sovereign default. This has been a long and difficult journey, comprising painful reforms and a very complex debt restructuring,” Siriwardana said in a post on ‘X’.
Fitch Ratings on Friday upgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’, from ‘RD’ (Restricted Default). Fitch typically does not assign an Outlook to sovereigns with a rating of ‘CCC+’ or below.
Fitch also upgraded the Local-Currency IDR to ‘CCC+’, from ‘CCC-’, to align with the Long-Term Foreign-Currency IDR, as the risk of another default on local-currency debt has been reduced by the completion of the international sovereign bond (ISB) restructuring and an improved outlook for macroeconomic indicators.
“Sri Lanka completed the local-currency portion of its domestic debt optimisation in September 2023, following the exchange of Treasury bills and provisional advances held by the Central Bank of Sri Lanka into new Treasury bonds and bills,” Fitch added.
In his ‘X’ post, Siriwardena also said the following:
All the hard work and sacrifice, particularly by the people of Sri Lanka, has now paid off and Sri Lanka has the opportunity for a fresh start in the new year.
This achievement is a testament to the tireless efforts of colleagues at the Ministry of Finance, Central Bank, Sri Lanka’s political leadership since April 2022, and our advisers Lazard and Clifford Chance who provided amazing support to enable this positive outcome. The support of international financial institutions, particularly the International Monetary Fund (IMF), other domestic and international agencies, foreign Governments, and all the creditors are owed gratitude for their tremendous support.
This rating upgrade reflects two key points that all Sri Lankans should consider seriously: First, it was easy to make the policy mistakes that brought the country to an unprecedented, deep, and complex crisis that we have experienced since 2022. To this day, I maintain that Sri Lanka’s economic crisis was a man-made crisis, since the crisis could have been prevented – or at least the impact could have been mitigated – if the warning signs had been heeded and policy direction was changed in a timely manner, including an early engagement with the IMF.
The consequences were deadly, as the economic crisis shattered the expectations of 22 million people while having a negative impact on the generations to come.
Second, while macroeconomic outcomes have indeed been satisfactory and the debt restructuring process is complete, culminating in this rating upgrade, people still feel the pain from the crisis and the difficult remedial measures.
With the stability in the economy, measures are now needed to provide further momentum for inclusive and sustainable growth. This is necessary to create jobs and generate income that will help rebuild the lives of all Sri Lankans.
However, this growth cannot come at the expense of economic stability. All too often in Sri Lanka’s past, whenever the economy has stabilised following a shock, we are too eager to provide unsustainable fiscal and monetary stimulus to reinvigorate growth. The result is a rapid return to instability – which has characterised several stop-go cycles in Sri Lanka’s post-independence economic history. In the past, Sri Lanka’s economic policy has been volatile, vacillating from one extreme to the other based on political shifts.
It is crucial that regardless of political changes, Sri Lanka adheres to some fundamental economic principles, such as fiscal discipline and sound monetary management. In particular, the stabilisation of public finances is vital to create fiscal space for development, and fulfil commitments to both domestic and international stakeholders. It is indeed heartening that we are now seeing early signs of de-politicisation of macroeconomic policy discipline.
This would be entrenched by a strong legal and institutional framework, including the Central Bank of Sri Lanka Act, Public Financial Management Act, Public Debt Management Act, and associated institutions.
Whilst this rating upgrade is a crucial milestone, I firmly believe this is just the start of Sri Lanka’s journey towards prosperity for all, where everyone should make their utmost contribution. There is no room to repeat policy errors by relying on dogmatic beliefs, ideological leanings, and being led by false narratives which typically lead to unrealistic and unsustainable policies. It is the key lesson that all of us Sri Lankans should learn from this painful, stressful, and very tough process that we were forced to undergo during the last 32 months. The collapse happens rapidly, but the recovery is painful and difficult. I hope these lessons are ingrained in our society now and in the future as we reflect on this journey.
This is indeed a historic moment and a time to celebrate – but it is a moment that should never be repeated.