Long road to recovery amid rating upgrade

In a welcome but cautious development, Fitch Ratings has raised Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘RD’ (Restricted Default) to ‘CCC+’, signalling a step towards recovery after the country’s worst economic crisis in its post-independence history. Alongside this, the agency has also upgraded Sri Lanka’s Local-Currency IDR to ‘CCC+’, from ‘CCC-’, to align with the improved outlook for its foreign-currency debt. These upgrades are certainly good news, reflecting a reduction in the risk of further defaults and signalling that the country is slowly emerging from the economic abyss into which it plunged in 2022.  

However, it is critical to recognise that while these upgrades offer hope, Sri Lanka’s journey to full recovery remains fraught with challenges, and accountability for the crisis is long overdue.

Fitch’s decision to upgrade Sri Lanka’s ratings follows the successful completion of its international sovereign bond restructuring process, a vital step that has alleviated some of the immediate pressures on the country’s foreign debt obligations. In addition, there has been an improvement in key macroeconomic indicators, including inflation rates and fiscal stability. The likelihood of another default on local-currency debt has been greatly reduced, thanks to the stabilising effect of these measures. 

However, while this upgrade reflects a positive trajectory, it must not be mistaken for a full recovery. The economic meltdown of 2022, which led Sri Lanka to its first-ever sovereign default, has left deep scars. The country continues to grapple with soaring poverty rates, high unemployment, and a volatile currency, which have placed millions of Sri Lankans in economic distress. The scars of this crisis are visible in the faces of the people, whose daily lives have been irrevocably altered by the collapse of the economy.

The country’s debt burden remains immense, and much of its fiscal space is still tied up in servicing this debt. Structural reforms will be essential for long-term economic stability, including improving governance, boosting exports, attracting investment, and fostering greater resilience in the face of global economic fluctuations. The country must also continue its engagement with international financial institutions like the IMF to maintain support and unlock further aid.

As the economy begins its arduous climb out of crisis, it is essential that we not lose sight of the human cost of the economic meltdown. The 2022 crisis, which culminated in the country’s default, was not a natural disaster, but the result of a series of reckless decisions, poor governance, and systemic mismanagement. The public sector’s fiscal mismanagement, compounded by corruption and political ineptitude, led to a depletion of foreign reserves, which in turn caused the collapse of essential imports like fuel, food, and medicine.

Those responsible for this national calamity have yet to face justice. While there have been promises of investigations into the events leading up to the default, including the role of public officials, Central Bank authorities, and political leaders, there has been little in the way of concrete action. Accountability must be central to the recovery process. Without it, there is a real risk of repeating the same mistakes, as the institutions that failed to act in the national interest have not been held to account.