The Standard & Poor's Ratings Services (S&P) decision to downgrade Sri Lanka’s sovereign rating from B+ to B citing certain concerns is factually incorrect, logically untenable and grossly misleading said the Central Bank.

Sri Lanka has experienced a decline in foreign exchange reserves in October and November 2008 due to the supply of foreign exchange to the market mainly to meet higher oil bill payments and to allow the outflows of Treasury bonds and bills. The Central Bank purchased US dollars 622 million out of foreign inflows including foreign investments in Treasury bonds and bills during the first 8 months to face events of this nature. On that basis, more than 60 per cent of speculative capital in terms of Treasury bonds and bills has already flown out the country and hence, the high risk of further loss of reserves is very unlikely. In addition, a large amount of short-term credit by way of petroleum bills has already been settled and therefore, the pressure on external reserves as well as the exchange rate will be much lower than that prevailed during the last two months. The Central Bank intervention in the foreign exchange market has also declined markedly since November 2008 and as of now, the Central Bank has even greater flexibility in the exchange rate management.

It is quite disappointing that S&P has apparently not realized that the decline in foreign exchange reserves is a global phenomenon under the present international financial crisis. Hence, it is grossly unfair to single out Sri Lanka only on a global situation and downgrade the rating position mainly based on that.

Furthermore, in contrast to the claims by S&P, the elimination of the fuel subsidies has improved the macroeconomic stability of the country further, as it has prevented the transfer of huge funds through the government budget by way of fuel subsidies. It is also a fact that the overall budget deficit of the country has declined gradually in the recent past from about 10.8 per cent of GDP in 2001 to around 7.0 per cent in 2008 has not given the due recognition by S&P. In commenting on the debt position in Sri Lanka also, S&P has simply neglected the improvements the country has achieved in the recent past. The true picture is that the debt burden of the country has eased significantly over the years, which is reflected in the sharp decline in the outstanding debt to GDP ratio from 105.6 per cent in 2002 to 75 per cent by end of 2008 as has been projected by S&P.

Further, in contrast to the S&P’s claim, there is no evidence that migrant worker remittances will decline in the near future. In fact, past experience shows that remittance flows are counter cyclical as Sri Lankan expatriates tend to make more remittances during the periods of slower economic growth. In addition, the S&P’s presumption that the preferential access to EU markets will lose is also incorrect, as Sri Lanka has just received the confirmation of the GSP+ facility for the next 3 years.

The above matters that S&P has, for whatever reasons, unfortunately suggests that S&P has deliberately neglected the recent improvements in the country’s macroeconomic fundamentals. This is even more significant when it is observed that S&P pointedly does not refer to the much concerned economic variable, inflation. In fact, the rate of inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (CCPI), which risen to 28.2 per cent in June 2008, decelerated to 16.3 per cent in November 2008 for the fifth consecutive month. This improvement, which was achieved as a result of the favourable developments on both demand and supply factors, is expected to continue.