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Fitch ratings became the second international rating agency yesterday to downgrade Sri Lanka over the ongoing political crisis. The key reasons for the downgrade given by Fitch are the heightened refinancing risks of debt, uncertain policymaking and possible loosening of fiscal consolidation measures as Sri Lanka faces possible elections next year. The combination of these issues is worsened by a possible increase in Sri Lanka’s budget deficits and tumultuous external issues such as an appreciating dollar and rising interest rates by the US Federal Reserve. 

According to Fitch, Sri Lanka has to repay an estimated $ 20 billion from 2019-2022. Given these volumes, it is likely that the Central Bank would have to go to international financial markets to raise capital. In such a situation, it is imperative that the International Monetary Fund’s (IMF) Extended Fund Facility is allowed to come to a conclusion in June, not merely because of the $ 1.5 billion that would be transferred to Sri Lanka but more importantly because the program will reassure markets and allow Sri Lanka to borrow at moderate interest rates. 

Since 26 October, political turmoil triggered by President Maithripala Sirisena’s appointment of MP Mahinda Rajapaksa has seeped into the economy. Rupee depreciation accelerated and there are concerns that this may continue for the next several months as the Central Bank does its best to protect reserves for debt repayments but also allow for the gradual moderation of the currency. As an economy dependent on imports and also facing significant debt repayments, Sri Lanka’s politicians need to focus on the overall health of the economy rather than dishing out sporadic tax cuts to improve their popularity in case of an upcoming election or holding rallies.   

The constitutional deadlock triggered by the actions of President Sirisena for the benefits of a few politicians is now in danger of bringing the entire country to a halt. Due to the interim order by the Court of Appeal, there are legal questions over the actions of the Cabinet and its secretaries. President Sirisena calling on the Cabinet secretaries to continue their work regardless of the interim order is deeply concerning. It is also worrying that Sri Lanka is heading to a new year without a Budget at a time when serious macroeconomic management is essential to foster growth. 

It is now time for President Sirisena, MP Mahinda Rajapaksa and other key political leaders to put aside their political differences and find a way to democratically resolve this standoff as soon as possible. Rajapaksa’s appeal to the Supreme Court on the interim order given by the Court of Appeal, while perfectly within his rights, may increase the gridlock rather than improve Sri Lanka’s democratic credentials and allow for the establishment of a constitutionally recognised Cabinet that has the backing of Parliament. President Sirisena has gone on record saying that he believes the current political standoff will be resolved within a week, perhaps based on the decision of the Supreme Court which began hearings yesterday on petitions filed on the gazette to dissolve Parliament. For many Sri Lankans worried about the economy even that may seem too long. 

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