S&P’S lower rating of SL’S foreign currency rating unwarranted, says CB

S&P’S revised, negative rating of Sri Lanka’s foreign currency is unwarranted because the Government and the Central Bank (CB) have taken necessary measures strengthen Sri Lanka’s performance on the fiscal, monetary and the external front, the CB said.

Firing a quick statement, after the Standard & Poor’s rating agency announcement revising to ‘stable’ from ‘positive’ and lowering the country’s long-term local currency rating from BB- to B+, the CB said the economy is estimated to have grown by around 8.3 % in 2011 recording the second consecutive year with an annual growth rate of 8 % or above for the first time in the post-independence history. Year-on-year inflation has remained at single digit levels in the last 37 months, and last month (February) inflation fell to 2.7 %.

“Inflation is expected to continue to be at single digit levels in 2012, notwithstanding the recent adjustments to domestic energy prices. The debt to GDP ratio is also projected to improve to below 79 % in 2011, the lowest after 1981.

Referring to the policy change of withdrawing from intervening in the foreign exchange market mainly for the partial settlement of oil bills, the Bank said this policy change has resulted in the rupee depreciating by 5.1 % against the US dollar during the period from 9 February to 28 February.

“The depreciation of the rupee is expected to have a contractionary effect on imports, while foreign fund inflows are likely to be encouraged. In that context, foreign investments in government securities have already increased, with a net inflow of $216 million during the period 9-29 February. FDI, which exceeded $1 billion in 2011, is also projected to increase further in 2012. Hence, the country’s international reserves, which are currently at US dollars $5.7 billion, are expected to improve during the year.”

The Bank said the IMF-SBA programme is progressing with plans of completing the 7th review towards the end of March 2012.

It said that in addition to ensuring that inflation is maintained at single digit levels in the medium term, the deceleration in credit expansion (after recent policy measures) will lead to the reduction of expenditure on imports and the reduction of the deficit in the current account of the balance of payments.

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Referring to the policy change of withdrawing from intervening in the foreign exchange market mainly for the partial settlement of oil bills, the Bank said this policy change has resulted in the rupee depreciating by 5.1 % against the US dollar during the period from February 9 to February 28.