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COLOMBO: International ratings agency Fitch downgraded cash-strapped Sri Lanka Saturday due to mounting fears of a sovereign default on its $26 billion foreign debt, but Colombo insisted it will meet its obligations.

The downgrade by one notch from “CCC” to “CC” came a day after Sri Lanka reported a 1.5 percent contraction in the third quarter of this year as a foreign exchange crisis wrecked its recovery from the coronavirus pandemic.

Fitch said the downgrade reflected its view of an “increased probability of a default event in coming months” as Sri Lanka’s foreign reserves slumped to $1.58 billion at the end of November.

“We believe it will be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources,” the agency said in a statement.

However, the Central Bank of Sri Lanka accused Fitch of making a “reckless” downgrade ignoring “positive developments” in the economy.

Sri Lanka economy slumps in face of forex crisis

“It must also be noted that the government has given a clear assurance that Sri Lanka will honour all debt obligations in the period ahead,” the bank said in a statement. Fitch noted Sri Lanka has to repay two international sovereign bonds of $500 million in January 2022 and $1.0 billion in July 2022 with little improvement in capital inflows into the nation of 21 million people.

It added foreign-currency debt service payments, including principal and interest, total $6.9 billion for next year, the equivalent of nearly 430 percent of the island’s official gross international reserves as of November 2021.

The island’s tourism-dependent economy was hammered by the pandemic and authorities responded to falling foreign exchange reserves with a broad import ban, triggering shortages including food, fuel and medicines. The crisis has spread to manufacturing and services, and agriculture has also suffered badly due to a ban on agrochemical imports.Sri Lanka’s economy had grown 12.3 percent in the second quarter but a third wave of Covid-19 infections that forced a 41-day curfew saw services and industries heavily affected, the statistics office said on Friday.

Its foreign reserves of $1.58 billion at the end of November have decreased from $7.5 billion when the government of Gotabaya Rajapaksa took over two years ago.

Supermarkets have rationed staples such as milk powder, sugar, lentils, tinned fish and rice as commercial banks run out of dollars to finance imports.

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