Author: TELO Admin

“Go Home Gota” and/or “Gota Go Home” is the resounding clarion call that is currently motivating and mobilizing a number of protest demonstrations throughout Sri Lanka. The underlying thread is that Sri Lanka’s Executive President Gotabaya (Gota) Rajapaksa should resign and quit. The social media too is replete with demands of a similar nature. Even the “Boney M” Group’s 1979 Album “Oceans of Fantasy” lead single “Gotta Go Home” has acquired a fresh lease of life in the internet among those who want Gota to go home. Indeed the repetitive refrain “Gotta go home, home, home, Gotta go home” sounds most appropriate to the prevalent domestic political situation.

The Boney M song also has the line “Going back home. Going back home”. That however does not seem possible at least for now. Gota does not want to go home! Chief Government Whip and Highways Minister Johnston Fernando has stated in Parliament that President Gotabaya Rajapaksa would not resign. “As a responsible government, we state that President Gotabaya will not resign from his post, under any circumstances,” Minister Fernando reportedly said. Apparently President Rajapaksa feels that 6.9 million citizens of the country who voted for him have provided a mandate that cannot be overturned by mass demonstrations.

According to informed SLPP circles, President Gotabaya accepts that the people are protesting living conditions like shortages, rising prices, loss of livelihood decline of the rupee’s value etc. The people wanted these problems to end and their initial demonstrations were organic and genuinely spontaneous. However Gotabaya opines – according to SLPP circles – that Sajith Premadasa his chief rival at the 2019 hustings diverted the protest demanding immediate action to resolve these problems into an agitation demanding the President’s resignation and a handover of Govt to the “Samagi Jana Balawegaya”(SJB). Therefore he invited the opposition parties including the SJB to join a new interim Govt. This was spurned and the call for Gota to resign was renewed. As such, Gota will “stay put and fight,” say these sources.

Against this backdrop it is now becoming increasingly clear that President Rajapaksa is not going to resign and can’t be compelled to quit if he is not willing to do so. It is in a sense a stalemate.

Given the speed in which the SLPP-led Govt is disintegrating and the realization that the country has deteriorated under the present executive president, there is much optimism that the Bill would be passed with two-thirds and approved at a referendum. The abolition of the executive presidency may be possible at last

Sajith Premadasa

However in a surprising move, the SJB Leader and leader of the opposition Sajith Premadasa called on all parliamentarians to seize the opportunity at hand and support legislation to abolish the Executive Presidency. Speaking in Parliament on April 5, Sajith said “The time has come to abolish the Executive Presidency. Let us use this opportunity to change this system and introduce one with checks and balances. Let us use all the available emergency constitutional tools available and within this week bring laws to abolish the Executive Presidency.”

The opposition leader’s call to abolish the executive presidency was most welcome to all those who perceive the executive presidency as a major cause of the country’s ills. Yet, there were some who were doubtful because some of Sajith’s key supporters and advisers wanted the executive presidency to be retained. Premadasa himself had not been vocally active against the executive presidency. He had also contested the 2019 presidential poll. It was felt in some quarters that Sajith’s call was a tactical response to Johnston Fernando’s assertion that Gota was not going to resign.

Much of these misgivings and doubts about Sajith Premdasa’s position diminished by an important event on the following day – April 6. It may be recalled that Jaffna District MP and Tamil National Alliance (TNA) spokesperson M.A. Sumanthiran had taken the initiative to convene two multi-party meetings to discuss the prevailing economic and political crisis afflicting Sri Lanka. The objective was to forge a collective position on these. Leaders and representatives of several political parties had met and engaged in brainstorming sessions. A consensus was arrived at regarding economic issues and a document prepared and submitted to the President.

Monarch Imperial Hotel

Now a third meeting was held on April 6 to discuss the ongoing political crisis. Several political party leaders and MP’s participated in a four-hour meeting from 5.30 pm to 9.30 pm at the “Monarch Imperial Hotel” in Kotte. Among those who attended the meeting were opposition and SJB Leader Sajith Premadasa, UNP Leader and former PM Ranil Wickremesinghe, Former Speaker Karu Jayasuriya, Muslim Congress Leader and MP Rauff Hakeem, TPA leader and MP Mano Ganeshan, Former Ministers and SJB MPs Eran Wickremaratne and Dr. Harsha de Silva.

After intense discussions, it was resolved that President Gotabaya Rajapaksa should heed the voice of the people and resign voluntarily. The Sri Lankan people cutting cross ethnicity and religion demand it. Besides no effective turnaround of the economy is possible under the Gotabaya Rajapaksa dispensation. Steps should be taken to reduce or eliminate his power. The best way to do that is to abolish the executive presidency itself. The Sri Lankan people would gladly welcome the disempowerment of the ruling executive president by abolishing the executive presidency. In short the executive presidency “throne” on which Gota was sitting would be yanked away from under his posterior.

Sajith Premadasa stated that the SJB’s position on abolishing the executive presidency would be officially announced in Parliament the following day though he would not be in the House due to the TPA/SJB protest rally at Talawakelle. On March 7, SJB Kandy district MP and Chief Opposition whip Lakshman Kiriella announced in Parliament that the SJB was committed to abolishing the Executive Presidency. He said that the SJB will introduce a draft Bill to the House shortly to abolish the Executive Presidency and asked the Government to support the move. “When we brought the 19th Amendment to the constitution, we had only 45 MPs but we managed to discuss with all parties and get the needed 2/3rd support for it. We can do this again,” Kiriella said.

Private Members Bill

It is learnt that efforts will be underway soon to draft the bill to abolish the executive presidency. It will most likely be presented to Parliament as a Private members Bill by Opposition Leader Sajith Premadasa himself. The abolition of the executive presidency would require the Bill to be passed by two-thirds majority in Parliament and endorsed by the people at a countrywide referendum. Given the speed in which the SLPP-led Govt is disintegrating and the realization that the country has deteriorated under the present executive president, there is much optimism that the Bill would be passed with two-thirds and approved at a referendum. The abolition of the executive presidency may be possible at last.

The fact that the opposition leader himself is presenting the Bill to do away with the executive presidency, adds much importance and weight to the exercise. It is also significant that Sajith is the son of Ranasinghe Premadsa who was closely associated with JR Jayewardene in introducing the executive presidential system. JR was the first and Premadasa the second executive presidents of Sri Lanka.

Junius Richard (JR) Jayewardene

The genesis of the executive presidency in Sri Lanka needs to be examined briefly in order to place the current moves connected to the abolition of the executive presidency in perspective. As stated earlier it was Junius Richard Jayewardene (J.R. Jayewardene) known as JR who masterminded the change of Sri Lanka’s political system from the British Westminister model to that of one closely resembling the French Gaullist Constitution. Power shifted to the president who was transformed from a figurehead to an effective head of state. The post of Prime minister got devalued. Nevertheless JR did work through Parliament also by ensuring that the cabinet would consist of Parliament members only.

JR had first articulated his vision of a presidential system in December 1966. When JR was Minister of State in the UNP Government of Dudley Senanayake (1965 -’70), he made a ground-breaking speech at the Association for the Advancement of Science. JR in his keynote address of December 14, 1966, outlined his vision for an executive presidency and argued in favour of a presidential system based on the US and French models.

“The Executive will be chosen directly by the people and is not dependent on the Legislature during its period of existence, for a specified number of years. Such an Executive is a strong Executive seated in power for a fixed number of years, not subject to the whims and fancies of an elected Legislature; not afraid to take correct but unpopular decisions because of censure from its parliamentary party,” he said. The essence of JR’s “vision” is in the words “an Executive chosen directly by the people not dependent on the whims and fancies of an elected Legislature”.

JR’s advocacy of an executive presidency sent shock waves down the political establishment then. Relations between Premier Dudley Senanayake and State minister JR had deteriorated at that time. Dudley was firmly opposed to the idea. There were few takers for JR’s proposal even within the United National Party. In that environment JR was unable to push his proposal further but never let go of his vision. JR pursued his goal of creating an executive president that was not dependent on Parliament with great zeal and patience.

Constituent Assembly

The chance for JR to espouse his executive president vision in the form of a tangible proposal came six years later during the United Front (UF) Government of Sirimavo Bandaranaike (1970-’77). Parliament had converted itself into a Constituent Assembly to draft a new constitution. JR was then the Leader of the Opposition while Dudley Senanayake remained Leader of the UNP.

On July 2, 1971, JR moved a resolution in the Constituent Assembly. It read as follows: “The Executive power of the State shall be vested in the President of the Republic, who shall exercise it in accordance with the provisions of the Constitution. The President of the Republic shall be elected for seven years for one term only by the direct vote of every citizen over 18 years of age. The President of the Republic shall preside over the council of ministers.”

JR’s motion was seconded at the Constituent Assembly by Ranasinghe Premadasa who was then the Colombo Central MP and Chief Opposition Whip. JR argued eloquently, within the Constituent Assembly, in support of an executive presidency. The motion was shot down then. Constitutional Affairs minister Dr. Colvin R. de Silva led the Govt. onslaught against JR’s proposal. Even the majority of UNP Parliamentarians were not supportive as party leader Dudley Senanayake himself was firmly opposed to the idea. The JR –Premadasa motion was rejected by the Constituent Assembly then.

The UF Government brought in the new Republican Constitution on May 22, 1972. The Governor General position under the earlier Soulbury Constitution gave way to the post of President. Power was vested in Parliament known then as the National State Assembly and while President William Gopallawa was the titular Head of State, the real power was retained by Prime Minister Sirimavo Bandaranaike.

Dudley Senanayake passed away in 1973 and JR succeeded him as UNP Leader. He soon established his leadership position and brought the party under his full control. JR was now able to pursue his vision of an executive presidency from a strong position.

July 1977 Parliamentary Elections

Parliamentary Elections were held in July 1977. The UNP manifesto of 1977 stated, “Executive power will be vested in a president elected from time to time by the people. The Constitution will also preserve the parliamentary system we are used to and the prime minister will be chosen by the president from the party that commands a majority in Parliament and the ministers of the cabinet would also be elected members of Parliament.”

The change to an executive president from prime ministerial system was a key aspect of the UNP electoral campaign in 1977. The UNP swept the polls and obtained 141 out of the total 168 parliamentary seats. JR became Prime Minister in July 1977. He began moving fast towards his cherished vision of an executive presidency.
JR and a small group of ministers and party stalwarts in association with leading lawyer Mark Fernando (later a Supreme Court Judge) started working towards the goal of introducing the executive presidency. The preliminary discussion was on August 7, 1977. An amendment to the Republican Constitution of 1972 was first drafted. After discussions in Cabinet it was approved and certified by the Cabinet as “urgent in the national interest”.

Thereafter it was sent by the Speaker to the Constitutional Court which prevailed at that time, as an “urgent bill”. The Constitutional Court approved the Bill within 24 hours as stipulated. It was then presented to the National State Assembly for debating and voting. The bill was adopted by the then National State Assembly on September 22, 1977 as the Second Constitutional Amendment. Executive power was transferred to the President and JR Jayewardene became the first Executive President of Sri Lanka on Independence Day, February 4, 1978.

Parliamentary Select Committee

Meanwhile JR was also working towards the goal of replacing the 1972 Constitution in its entirety with a new one. On October 20, 1977 the National State Assembly passed a resolution enabling the then Speaker Anandatissa de Alwis to appoint a Select Committee for Constitutional Reform. The essence of the Select committee mandate was “to consider the revision of the Constitution of the Republic of Sri Lanka and other written law as the committee may consider necessary”.

The Parliamentary select committee was announced on November 3, 1977. Initially the chairman was JR who was then representing Colombo West in Parliament. JR however had to vacate Parliament as an MP in February 1978 after he became President. Ranasinghe Premadasa who was also serving in the select committee was then appointed chairman on February 23, 1978 by the Speaker. Premadasa was also appointed Prime Minister.

Other MP’s from the UNP in the select committee were Gamini Dissanayake, Lalith Athulathmudali, Ronnie de Mel, KW Devanayagam and MHM Naina Marikkar. MP’s from the SLFP appointed to the committee were Sirima Bandaranaike and Maithripala Senanayake. Ceylon Workers Congress Leader Saumiyamoorthy Thondaman who had not joined the Govt. then was also on the committee. The chief opposition party of that time the Tamil United Liberation Front (TULF) refused to serve on the committee. In May 1978 both SLFP representatives withdrew from the select committee. Since the left parties had been wiped out in the 1977 poll, there were neither Trotskyites nor Communists in the committee.

The executive presidency ushered in through the earlier second amendment was now streamlined and incorporated in the new draft constitution. The executive president was now head of state and head of Govt. The electoral system was also changed from the first pass the post victor system to that of proportional representation. Sri Lanka became a Democratic Socialist Republic. The new Constitution referred to popularly as the “JR Constitution” was formally promulgated on September 7, 1978.

Gaullist System in Asia

After the presidential system was installed, Prof. Alfred Jeyaratnam Wilson analyzed it in his book ‘The Gaullist system in Asia: The Constitution of Sri Lanka’. In it he observed: “What Jayewardene was after was a stable Executive which would not be easily swayed by pressures from within or outside. The outcome in the end was a President who in many ways and can in certain circumstances be more powerful than the French President.” A crucial point to note is that though JR introduced a presidential system, he did not provide for a cabinet appointed from outside Parliament. JR was also averse to a powerful Presidential Secretariat as a parallel centre of power to the Cabinet.

Why was that?

In response to Prof. Wilson’s specific query on that issue, JR replied, “I must say I am very reluctant to appoint advisers who will be around the president. The reason is that I wish the president to have only his prime minister and the cabinet of ministers as advisers because they represent the people as Members of Parliament.”

J.R. Jayewardene also outlined this position at the convocational address of the University of Sri Lanka on May 31, 1978. This is what he said at the time: “I am the first elected Executive President, Head of State and Head of Government. It is an office of power and thus of responsibility. Since many others will succeed me I wish during my term of office to create precedents that are worthy of following. First, I will always act through the Cabinet and Parliament, preserving the parliamentary system as it existed without diminution of their powers. Second, I will not create a group known as the President’s men and women who will influence him.”

This then was JR Jayewardene’s definition of the Presidency he had set up. This practice of following the British cabinet model and confining such cabinet ministers to be members of Parliament has created an impression that the old system prevailed still in full force.

Constitutional “Dictator”

Notwithstanding JR’s claims to the contrary the reality was that governance had changed utterly in Sri Lanka after the executive presidency. The executive President was both above as well as independent of the “de- valued” legislature. Thus the first Sri Lankan executive president Junius Richard Jayewardene in practice became a Constitutional “dictator”.

D. B. S. Jeyaraj can be reached at dbsjeyaraj@yahoo.com

Fitch Ratings has downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘C’ from ‘CC’. The issue ratings on foreign-currency bonds issued on international markets have also been downgraded to ‘C’ from ‘CC’. The Long-Term Local-Currency IDR has been affirmed at ‘CCC’ and the Country Ceiling at ‘B-’.

KEY RATING DRIVERS

Default-like Process Has Begun: The downgrade of Sri Lanka’s Long-Term Foreign-Currency IDR reflects Fitch’s view that a sovereign default process has begun. This reflects the announcement by the Ministry of Finance on 12 April 2022 that it has suspended normal debt servicing of several categories of its external debts, including bonds issued in the international capital markets and foreign currency-denominated loan agreements or credit facilities with commercial banks or institutional lenders. We will downgrade the LT FC IDR to ‘RD’ once a payment on an issuance is missed and the grace period has expired.

Local Currency Debt Not Affected: The statement applies only to the government’s external debt obligations. Fitch understands from the announcement that locally issued government debt, whether in local or foreign currency, is not affected and assumes service on this will continue.

Since the last review, certain local-currency issuances’ ratings have been corrected to ‘CCC’ and now affirmed.

ESG – Governance: Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model. Sri Lanka has a medium World Bank Governance Indicator ranking in the 46th percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

ESG – Creditor Rights: Sri Lanka has an ESG Relevance Score (RS) of 5 for Creditor Rights as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The downgrade of Sri Lanka’s rating to ‘C’ reflects Fitch’s view that a default-like process has begun.

Reams can be written on the tragedy called Sri Lanka, and wagonloads of midnight oil can be burnt in debating the causes and remedies for this human disaster that consumed three generations and is threatening the health of the gen-next. India cannot ignore this latest Lankan tsunami of shortages, especially with the stalking Chinese dragon eyeing to gobble up the island and open a new battlefront barely 30 minutes by speedboat across the Palk Strait down south.

Sri Lanka, the lovely little pearl of the Indian Ocean, should not be in such deep distress, not so frequently. The Eelam war ended in May 2009 after consuming close to 2.5 lakh lives and just when the world expected the tear-shaped island to start smiling at spiking inflows into its treasury through a revival of tourism, tea exports and remittances of its citizens working abroad, yet another crushing load of woes has sunk it deeper. Redemption seems pretty tough unless a series of miracles happen from multiple magic wands, even as the rulers in Colombo and their detractors remain locked up in their selfish agendas.

With the decimation of the Tamil Tigers and their dreaded leader Velupillai Prabhakaran, President Mahinda Rajapaksa was hailed by the Sinhala majority (constituting about 75 per cent of the 22 million population) as the saviour of the country, a reincarnation of Emperor Dutugemunu, the legendary Sinhala king who had vanquished a Tamil monarch and unified much of the country under his rule over 2000 years ago. He was crowned by his masses as the Lion in the Sri Lankan flag (it has a roaring lion holding a raised sword in one hand).
Read | Gota’s gotta go, Lankans say, Destination Uganda?

Mahinda’s brother Gotabaya, the powerful defence secretary who had steered the war victory along with the military commander, General Sarath Fonseka, was his poster-mate when the presidential election was held eight months later, in January 2010. Mahinda won with a huge margin against his rival Fonseka, who was then put up as the combined opposition candidate in the hope he would be able to steal some of that war glory.

Riding regally upon the yuan-spitting Chinese dragon, ‘Emperor’ Mahinda has had a free run of Sri Lanka but for a brief topple in January 2015 when he lost the presidential election to his little-known cabinet colleague Maithripala Sirisena. He blamed India’s RAW for his defeat.

The Chinese quickly retrieved the throne for Mahinda after ‘neutralising’ Maithri with their time-tested therapy of bribes and bubbly perks. By the end of 2019, the Rajapaksa family was back in control, while pro-Delhi/pro-West Prime Minister Ranil Wickremesinghe of the rival UNP lost his seat in what was then seen as the first big victory for China over India in the tussle for control of the island.

With no challenger visible anywhere on the political horizon, Mahinda could have ruled the country for life if only he had not chosen to drown it in high corruption. Had he used his post-war popularity to push for constitutional reforms that replaced Sinhala supremacy with multiracial inclusivity, he would have gone down in history as one of the greatest statesmen in the world.

Instead, Mahinda, along with his Rajapaksa clan, chose to waste the opportunity that destiny presented him with. As the country thus seemed to be heading for disaster, the present crisis was hastened by a series of stupid revenue-depleting decisions—such as cutting taxes during the Covid hit, shifting the island’s agriculture to the less-yielding organic mode and using up huge chunks of foreign borrowings for servicing external debt and to create unproductive fancy structures.

A steep drop in foreign exchange reserves needed to import the essentials such as food, fuel and medicines led to unprecedented shortages of essentials. The expected happened when the finance ministry on April 12 admitted there was no option but to default on the $51 billion external debt, awaiting a bailout from the International Monetary Fund.

When the hungry-angry Sinhala people marched to President Gotabhaya’s house demanding he quit office, Gotabhaya saw an external hand—read India—in the rebellion and vowed not to quit. Hoping to distract the public anger, Prime Minister Mahinda got his entire 26-member cabinet to resign late-night April 4, but he stayed put in power.

Mahinda brought in Ali Sabry as his finance minister in a move seen by many as placating the oil-rich Gulf region. Sabry resigned within 24 hours but announced later he would rather stay since nobody came forward to accept the responsibility.

While China gleefully fanned the greed and arrogance of the Lankan First Family, getting in return one major project after another and gradually inching towards taking control of the island to strengthen its ‘String of Pearls’, India seemed to have all but lost the game. Delhi woke up to the threat of a new battlefront evolving down south only when the Chinese Ambassador Qi Zhenhong undertook a provocative trip to Jaffna (December 2021) and declared, “This is just the beginning”.

A series of quick remedial measures undertaken by the External Affairs Ministry, backed by a determined prime minister keen on India keeping its regional interests preserved and the loosening of purse strings by the Finance Ministry, plus the QUAD support, led to India stepping up its role to help Sri Lanka from its crisis. In this process, Delhi also managed to get Colombo to sign up six agreements during External Affairs Minister S Jaishankar’s visit there in March.

Three of them are of great strategic significance—wresting from China the project to build hybrid power projects in three Palk Strait islands close to south Tamil Nadu; creating a maritime rescue coordination centre that would mean access to the Sri Lankan air and sea space for Indian air-sea craft; and, helping in the maintenance and upgrade of fisheries harbours in the island. Needless to say, the last-mentioned project could bring almost the entire island coastline under India’s scrutiny if not controlled.

Of course, all these ambitious deals could get derailed by some succeeding regime in this slippery political mosaic unless India maintains its firm grip over the southern neighbour by keeping its lifeline going for the Sri Lankans from its own resources and through ‘safe’ collaborations with international financial institutions, such as the IMF, while also creating a monitoring mechanism to ensure that all the global aid coming into the island is properly utilised.

In this process, two challenges need to be overcome by some deft Jaishankarian diplomacy – winning the confidence of the majority Sinhala population that always had deep suspicion if not allergy towards India while regaining the support of the Tamils that was lost when the Eelam war collapsed, and they accused Delhi of collaboration in the massacre.

The second big challenge would be to get democracy back on its feet in Sri Lanka and help bring in a government that would be honestly friendly to India’s geopolitical interests, which means keeping a safe distance from the Dragon. This is the first time since their ascendancy that the Rajapaksas are facing this kind of Sinhala street anger, and Delhi must help in politically channelising this into positive energy for the good of the region.

External Affairs Minister Jaishankar seems to be on the right track and must work harder in bringing in the Tamil leadership to fall in line as well; right now, most of these Eelathalaivars with expiry tags stuck to their punctured lapels are squabbling over the leadership of the Tamil National Alliance (TNA). This is what I had meant when I spoke of miracles happening off multiple magic wands.

(R Bhagwan Singh is a senior journalist based out of Chennai, writing on Sri Lanka since the 1980s)

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.

The Samagi Jana Balawegaya signed a no-confidence motion against the government and an impeachment motion against the President on Tuesday (12).

Thus, the Opposition Leader Sajith Premadasa, with his group of parliamentarians, signed them at the Office of the Leader of the Opposition, according to a Facebook post.

The Leader of the Opposition said that the Samagi Jana Balawegaya stands together with the people fighting on the streets against the government and will work for all possible democratic victories in Parliament to realize it.

He added that, in addition to the no-confidence motion and the impeachment, they will continue a fight for the reversal of the 20th Amendment and re-enactment of the 19th Amendment and for all democratic victories by constitutional means.

Fitch Ratings has placed has placed 13 state and private banks in Sri Lanka under watch for possible downgrade (rating watch negative) due to forex shortages in the banking system.

The rating watch negative “reflects heightened near-term downside risk stemming from constrained access to foreign-currency funding and the resulting indications of stress experienced by the banks in the system,” Fitch said.

“This risk is exacerbated by the sovereign’s credit profile (Long-Term Foreign-Currency Issuer Default Rating (IDR): CC, Long-Term Local-Currency IDR: CCC) and the ensuing risks to the stability of the financial system.”

The full statement is reproduced below:

Fitch Places 13 Sri Lankan Banks on Rating Watch Negative

Fitch Ratings – Colombo – 12 Apr 2022: Fitch Ratings has placed the National Long-Term Ratings of 13 Sri Lankan banks on Rating Watch Negative (RWN). The banks are:

-People’s Bank (Sri Lanka) (PB)

-Commercial Bank of Ceylon PLC

-Hatton National Bank PLC

-Sampath Bank PLC

-National Development Bank PLC

-DFCC Bank PLC

-Seylan Bank PLC

-Nations Trust Bank PLC

-Pan Asia Banking Corporation PLC

-Union Bank of Colombo PLC

-Amana Bank PLC

-SANASA Development Bank PLC

-Housing Development Finance Corporation Bank of Sri Lanka (HDFC)

A full list of rating actions is at the end of this rating action commentary. Fitch will review the National Ratings of Sri Lankan financial institutions that are not mentioned in this commentary separately. Fitch has also taken rating action on Bank of Ceylon; please see Fitch Places Bank of Ceylon on Rating Watch Negative.

KEY RATING DRIVERS

The RWN reflects heightened near-term downside risk stemming from constrained access to foreign-currency funding and the resulting indications of stress experienced by the banks in the system. This risk is exacerbated by the sovereign’s credit profile (Long-Term Foreign-Currency Issuer Default Rating (IDR): CC, Long-Term Local-Currency IDR: CCC) and the ensuing risks to the stability of the financial system.

We believe mounting currency stress increases the likelihood of restrictions being imposed on banks’ ability to service their obligations in foreign currency – excluding
HDFC, as the bank does not have any outstanding foreign-currency obligations – and local currency in the event of a sovereign default, or prior, should confidence deteriorate.

We aim to resolve the RWN in the next six months, depending on the evolution of the banks’ funding and liquidity positions, which could result in multiple notch downgrades.

We believe the domestic banks’ foreign-currency funding and liquidity positions are prone to sudden changes amid already weak creditor sentiment. Loan and deposit dollarisation for the sector was at 18% of total loans and 17% of total deposits as at end-2021.

Sri Lanka’s operating environment remains challenging and our negative outlook on the score reflects the significant near- to medium-term downside risk presented by the weakening sovereign credit profile, as spillover effects could damage the country’s economic performance.

This has lead us to revise our 2022 outlook on the banking sector to ‘Deteriorating’, from ‘Neutral’.

Macroeconomic challenges are likely to be greater than we initially anticipated which could result in a sharp deterioration in asset quality and impaired profitability metrics that expose the banks to capital deficiencies.

The RWN on the ratings of the banks’ senior unsecured debentures, where assigned, stem from the RWN on the corresponding banks’ National Long-Term Ratings. Sri Lanka rupee-denoted senior debt, where applicable, is rated at the same level as the National Long-Term Rating in accordance with Fitch criteria. This is because the issues rank equally with the claims of the banks’ other senior unsecured creditors.

SUBORDINATED DEBT

The RWN on the ratings of subordinated debt, where assigned, also stems from the RWN on the corresponding National Long-Term Ratings. Sri Lanka rupee-denominated subordinated debt, where applicable, is rated two notches below banks’ National Long-Term Ratings. This is in line with our baseline notching for loss severity for this type of debt and our expectations of poor recovery.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The RWN reflects rising risks to the banks’ ratings from funding stresses, which could lead to multiple notch downgrades. We expect to resolve the RWN in the next six months once the impact on the banks’ credit profiles becomes more apparent. Potential triggers that could lead to a multiple notch downgrade include:

– funding stress that impedes banks’ repayment ability

– significant banking-sector intervention by authorities that constrain banks’ ability to service their obligations

– a temporary negotiated waiver or standstill agreement following a payment default on a large financial obligation

– where Fitch believes a bank has entered into a grace or cure period following non-payment of a large financial obligation.

A downgrade of the sovereign rating stemming from a default event could also lead to a downgrade of the banks’ ratings.

Senior and subordinated debt ratings will move in tandem with the National Long-Term Rating

Factors that could, individually or collectively, lead to positive rating action/upgrade:

There is limited scope for upward rating action given the RWN.

PB has a 1.78% equity stake in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka Ltd.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

COLOMBO: Crisis-stricken Sri Lanka defaulted on its $51 billion external debt on Tuesday, calling the move a “last resort” after running out of foreign exchange to import desperately needed goods.

The island nation is grappling with its worst economic downturn since independence, with regular blackouts and acute shortages of food and fuel.

Sri Lanka’s finance ministry said in a statement that creditors, including foreign governments, were free to capitalise any interest payments due to them from Tuesday or opt for payback in Sri Lankan rupees.

“The government is taking the emergency measure only as a last resort in order to prevent further deterioration of the republic’s financial position,” the statement said.

It added that the immediate debt default was to ensure “fair and equitable treatment of all creditors” ahead of an International Monetary Fund assisted recovery programme for the South Asian nation.

The crisis has caused widespread misery for Sri Lanka’s 22 million people and led to weeks of anti-government protests.

International rating agencies had downgraded Sri Lanka last year, effectively blocking the country from accessing foreign capital markets to raise much-needed loans to finance imports.
Sri Lanka had sought debt relief from India and China, but both countries instead offered more credit lines to buy commodities from them.