Revan Aponso, World
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Ratings Downgrades and Foreign Relief: An Overview of the Sri Lankan Debt Crisis

By Revan Aponso

Towards the end of last year, three major ratings agencies, S&P Global Ratings, Moodys, and Fitch Ratings, all downgraded Sri Lanka’s credit ratings. S&P downgraded the country’s sovereign credit rating from B-/B to CCC+/C, Moody’s downgraded Sri Lanka’s “long-term foreign-currency issuer and senior unsecured rating” from B2 to Caa1 and Fitch downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from B to CCC. The following moves were reflective of expectations of deterioration due to the lack of favorable economic and fiscal conditions, largely due to the impact of the coronavirus pandemic on Sri Lanka. 

Currently, Sri Lanka’s has a GDP of around $84 billion and $23.3 billion in foreign debt. Annually, the country has a current account deficit of $1.8 billion, meaning that Sri Lanka spends more foreign currency, importing goods than they do earning foreign currency, exporting foreign goods. Main sources for export revenue include garments, which amounts to 52% of total exports, and traditional agriculture, such as rubber, coconut and tea, which amounts to 17% of total exports. A fair amount of export revenue also comes from remittances from expatriate workers, mainly in the Middle East. The government plans to meet their debt obligation between 2021 and 2025, paying around $4 billion annually, however, they only have $5.9 billion in foreign exchange reserves as of October of last year. This means the government has to borrow money. In the past, much of Sri Lanka’s foreign debt consisted of concessionary loans. These were loans commonly granted by agencies such as the Asian Development Bank, Japan International Cooperation Agency and the World Bank, to low income countries. Repayment for a majority of these loans are distributed over 25-40 years with an interest rate of 1 percent or less. However, after Sri Lanka was upgraded to a middle-income country in 2009, the government’s ability to access these loans decreased leading them to move to the international capital markets through the issue of International Sovereign Bonds (ISBs).

In addition to ISBs, Sri Lanka has the option to borrow money from China or the United States. U.S. loans commonly come with more oversight on how funds are used in addition to economic and spending targets associated with them. Therefore, in order to avoid these conditions, the government accepted money from China in the form of Foreign Currency Term Financing Facilities (FTFF’s) and Project loans. FTFF’s are a form of a syndicate loan in which the government is at liberty to decide how the money is allocated. In June of last year, the Sri Lankan government received a number of proposals for FTFF’s from banks such as Hong Kong and Shanghai Banking Corporation (HSBC), State Bank of India and the Industrial and Commercial Bank of China. However, despite the government’s ability to decide how funds are allocated, these loans come with oversight, dependent on the loaning banks terms and the laws of the home countries of the respective banks involved in the syndicate loan. 

Unlike FTFF’s project loans are strictly used for project purposes. Some examples of project loans from China to Sri Lanka in recent years include, the Hambantota Port and the Mattala Rajapaksa International Airport in Hambantota, Sri Lanka, and the Colombo-Katunayake Expressway. While all three projects were built using money from the Chinese government funded through the Exim Bank of China, the Hambantota Port is also currently owned and operated by the Chinese government. In return for much needed foreign exchange of over $1 billion to help with debt servicing, Sri Lanka formed a partnership with China to own and operate the port under a 99-year lease. 

As mentioned above, the decision of Moody’s, S&P and Fitch to downgrade Sri Lanka’s credit rating last year was due to the economic impact of the COVID-19 pandemic. The country’s main forms of foreign exchange earners such as expatriate incomes, tourism and apparel were all drastically affected due to travel restrictions and the overall pause and reduction in export economies. Additional loans also had to be taken out in order to combat the virus and help stagnation in the local economy. In March of last year, the Sri Lankan government signed a deal with China Development Bank securing $500 million in funding to combat the multitude of conditions brought on by the pandemic. 

The potential exchange of collateral in return for assistance in debt servicing or repayment is a fundamental risk for a debtor. With countries, the collateral could include infrastructure and land. In the end, Sri Lanka’s placement as an island in the middle of the Indian Ocean, known for beautiful beaches, plentiful wildlife and breathtaking hill country, make it an optimal location for tourism and shipping. Therefore, the transfer of land and infrastructure to China was seen as an optimal exchange for payments to improve Sri Lanka’s balance of payments. □

Work Cited

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  6. Fitch ratings: Credit ratings & analysis for financial markets. (n.d.). Retrieved April 01, 2021, from
  7. Foreign Currency Term Financing Facility (FTFF) for the Government of Sri Lanka – 2020. (2020, July 17). Retrieved April 01, 2021, from
  8. Higgins, M. (2020, September 28). Moody’s downgrades Sri Lanka’s ratings to CAA1, outlook changed to stable. Retrieved April 01, 2021, from–PR_431359
  9. Ignacio, J. (2020, December 11). S&P downgrades Sri Lanka over deteriorating fiscal position. Retrieved April 01, 2021, from
  10. Writer, S. (2020, May 15). Sri Lanka piles on more chinese loans amid virus and debt crisis. Retrieved April 01, 2021, from

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