Standard & Poor (S&P) rating on Lanka unwarranted

Sri Lankan authorities are greatly surprised and disappointed by the decision taken by S&P to revise the outlook on the rating of the country from “stable” to “negative” today.

Such a change has been effected without any prior information or discussion with the Sri Lankan authorities. The reasons that have been attributed by S&P for the revision of outlook are also untenable.

Sri Lanka’s key macroeconomic variables have shown overall improvement since the last revision of outlook by S&P in August 2007. In particular, the debt to GDP ratio, budget deficit, government revenue, foreign reserves, economic growth, investment and savings and balance of payments have improved significantly.

The performance and the stability of the financial sector has also improved.

The tight reserve money targets of the Central Bank were met with comfortable margins and the growth in broad money decelerated by end 2007.

The net credit to the government was within the targeted levels and the credit to the private sector decelerated.

The unemployment rate declined to its lowest ever level. At the same time, while inflation has been relatively high in Sri Lanka, it would be noted that high inflation is now a concern worldwide, as rising commodity and oil prices are impacting all countries.

Further, the recent high inflation in Sri Lanka has also been mainly due to the removal of oil subsidies, which in the long-term, would have a favourable impact on the economy.

In the meantime, the Government revenue to GDP ratio has been consistently improving over the past few years and the fiscal deficit as a percentage of GDP has also decreased in 2007.

The following table sets out the ground reality as against the claims and concerns that have been raised by S&P in their press release of even date.

It is also noted that S&P has referred to recent developments in the Government’s war against Tamil separatists as being a weight on the Sri Lankan rating. It is quite disappointing that S&P has apparently not realized that “war on terrorism” is a global effort and many countries are today dealing with terrorist threats in a similar manner.

In that context, S&P’s emphasis of this matter at this point of time when the Sri Lankan military is making clear headway in its effort to defeat terrorism and when a political way-forward as proposed by the All Party Representatives Committee is being implemented by the Government, raises further concerns as well.

It is abundantly clear that S&P has chosen to overlook the many favourable factors and are, for reasons best known to them, suddenly discovering weaknesses in fiscal and debt consolidation of such a magnitude that the outlook needs to be changed urgently.

This sudden reaction raises grave doubts as to the objectivity and impartiality of their decision, and Sri Lankan authorities view S&P’s decision as being illogical, ill-advised and without rational basis or foundation.

	S&P’s Claim	                            Reality

1.	Revenue growth has slowed to a		- Government revenue in 2007 is estimated to have
	projected 19.5 per cent in 2007,	grown by 21.6%.
	below the estimated nominal GDP		- The estimated growth in nominal GDP in 2007 is 21.3%.
	growth rate

2.	Total spending growth exceeded		- Total government expenditure is estimated to have grown
	revenue growth				by 18.8% in 2007, which is below the estimated nominal revenue
						growth of 21.6%.

3.	Negative real interest rate		- Public debt ratio improved significantly
	allows the financing of large		to 85.5% of GDP in 2007 from 89.2 % in 2006 mainly
	fiscal deficit without			due to higher real economic growth and stabilization
	significant corresponding increase	of the rupee against the US dollar.
	in public debt

4.	High credit growth to the		- Net credit to the government from the banking sector
	government and private sector		increased only by Rs. 17 billion in 2007 compared
						to Rs. 88 billion in 2006. This is consistent with
						the amount expected in the original budget for 2007.
			
						- The growth in credit to the private sector declined 
						from around 26% at the beginning of the year to 19.3% 
						by the end of 2007.
			
						- Central Bank contained the growth in reserve money to 
						10.2% in 2007 which is the lowest growth in several years 
						and in fact, was below the tight target.