ECONOMYNEXT - Sri Lanka can still manage its debt problem though a political crisis which has triggered downgrades has pushed up costs, Central Bank Governor Indrajit Coomaraswamy said.
Moody's, Standard and Poor's and Fitch have downgraded Sri Lanka's already speculative grade B+ debt to B+.
Even before the downgrades, foreign investors were selling down Sri Lanka's sovereign bonds.
"Clearly the political developments have increased the risk premium," Coomaraswamy said.
"We have to undertake significant borrowing going forward. And their costs would be higher, the tenor is likely to be shorter".
Sri Lanka has to repay a billion US dollar bond in January, and Coomaraswamy has said the bond can be repaid.
The central bank also has got parliamentary approval to raise up to 310 billion rupee equivalent to managed debt, under which it could raise and repay debt, he said.
In addition to short term measures the central bank and Treasury had devised a medium term strategy to put debt on a sustainable path.
"Now we still have those plans but the costs would be higher," he said. "The progress towards achieving sustainable external debt dynamics have been slowed down
"But the situation is still manageable provided the government maintains fiscal discipline and continues with the trajectory of fiscal consolidation they have set out.
"But room to maneuver we have had become less".
At the moment Sri Lanka is operating without a cabinet of ministers, with the President authorized by the constutution to hold only three ministries. Sri Lanka no longer has permanent secretaries under the current constitution and they lose office along with the cabinet.
Under the authority given by the parliament through the Active Liability Managment Act, the central bank could raise funds to repay both principle and interest of debt, Coomaraswamy said.
Sri Lanka followed a state-led investment strategy in the last 10 years with heavy borrowing from international capital markets and also China where some projects appear to have been done without proper feasibility studies.
Due to the state-led strategy the country sideline private and foreign investors putting restrictions on land ownership and also expropriating investments which reduced foreign direct investments.
Critics say a new administration which came to power in 2015 also failed to reverse the expropriations and slammed retrospective taxes compounding the problem.
There were also no privatizations to draw in competitive private investments only a government to government deal involving a port with China.
Sri Lanka had about 7.0 billion dollars of reserves by November, which is vulnerable to contradictory policy coming from sterilized forex sales.
Sri Lanka has an unstable soft-pegged exchange rate, which has not been reformed, and the country is vulnerable to artificially low interest rates generated by money printing though the central bank is simultaneously trying to collect forex reserves by pegging.