S&P Warns Sri Lanka of Credit Downgrade

The rupee has depreciated almost 20 percent since November 2011 with the worst fall happening since February.

Courtesy: lk.duinvest.com

(COLOMBO, Sri Lanka Xinhua) - Sri Lanka, already struggling under high fuel prices, could be in for a credit downgrade along with its neighbor India if prices continue to increase and subsidies are not reduced, a credit agency report said here on Monday.

"In India and Sri Lanka, we expect fuel and related subsidies to markedly worsen fiscal and external deficits unless subsidy levels fall," Standard and Poor's said in a report, adding "In the absence of offsetting positive developments, these sovereigns could see negative rating actions as a result."

However, the report points out that such an increase would be necessary only if oil prices hit around 150 U.S. dollars a barrel and prices remain at that level for at least a year, which it concedes would be "modestly likely".

Cost of living has increased in the country in recent months as a falling rupee forced price increases in essential foods including wheat flour.

February saw the increase of fuel prices and a growing trade deficit compelled the government to raise taxes in March on vehicle imports and other commodities.

The rupee has depreciated almost 20 percent since November 2011 with the worst fall happening since February.