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Moody's Investors Service ("Moody's") has today downgraded the Government of Sri Lanka's foreign currency issuer and senior unsecured ratings to B2 from B1 and changed the outlook to stable from negative.

The decision to downgrade the rating to B2 is driven by Moody's view that ongoing tightening in external and domestic financing conditions and low reserve adequacy, exacerbated most recently by a political crisis which seems likely to have a lasting impact on policy even if ostensibly resolved quickly, have heightened refinancing risks beyond levels anticipated when the rating agency affirmed the rating at B1 with a negative outlook in July. Moody's projections include a slower pace of fiscal consolidation than assumed in July to reflect disruption to fiscal policy implementation in a period of political turmoil.

The stable outlook denotes balanced credit risks at the B2 rating level. Moody's expectation is that, despite the current political crisis, any future government will remain broadly focused on implementing important fiscal, monetary and economic reforms that would strengthen the credit profile over the medium term. However, Moody's assessment is that the government's debt refinancing will remain highly vulnerable to sudden shifts in investor sentiment in a period of further tightening in financing conditions and political and policy uncertainty, with limited buffers to face such risk.

Concurrently, Moody's lowered the local-currency bond and deposit ceilings to Ba2 from Ba1. The foreign-currency bond ceiling was lowered to Ba3 from Ba2 and the foreign currency deposit ceiling was lowered to B3 from B2.

RATIONALE FOR THE RATING DOWNGRADE TO B2

Sri Lanka's low foreign exchange reserve coverage of large external debt repayments over the next five years exacerbates its reliance on external bilateral and commercial lenders' willingness to refinance maturing debt. The risks related to that structural external vulnerability are rising in an environment of tightening financing conditions globally and, most recently, heightened domestic political tensions which threaten to undermine international investors' confidence and the flow of foreign capital, from private markets and international bilateral lenders, into Sri Lankan financial assets.

The political situation has also resulted in delay to the disbursements planned under the IMF programme. A prolonged pause in the IMF programme, associated to uncertainty about the direction of policy, would likely undermine investors' confidence, exacerbating the tightening in financing conditions.

Tightening external financial conditions and domestic political instability are resulting in capital outflows and placing increasing pressure on the exchange rate and foreign exchange reserves. The Sri Lankan rupee has depreciated about 13% over the past 12 months to 176.7 per US dollar as of November 16, 2018, of which around 9% occurred in the last three months. In addition, spreads on Sri Lankan bonds over US Treasuries have widened sharply in recent weeks to more than 550 basis points. Combined, these factors are raising the value and cost of external debt.

If prolonged, tightening global financial conditions and domestic political instability could hinder the government's access to global capital markets, curb foreign direct investment inflows to the country and reduce funding from international lenders. Such conditions would undermine the sovereign's ability to meet its large external repayment obligations. The government will need to make principal payments on external debt that could be as high as $4 billion per year between 2019 and 2023, in addition to financing part of the budget deficit externally. International sovereign bonds account for a sizeable portion of maturing government debt over this period.

Moody's projects foreign exchange reserves (excluding gold and SDRs) to remain in a range of $6.5 to $7 billion in the coming years, lower than it forecast in July. As a result, Moody's estimates that Sri Lanka's External Vulnerability Indicator (EVI), the ratio of external debt payments due over the next year to foreign exchange reserves, will be about 180% in 2019 and 2020, higher than previously expected and much higher than the median level for B-rated sovereigns.

Parliamentary approval of the Active Liability Management Act in October allows the government to raise up to an additional LKR310 billion (approximately $1.7 billion, or 2% of GDP) over and above the government's annual borrowing requirements for the purposes of debt management. This gives the government some flexibility to smooth the timing of its debt refinancing operations and avoid a concentration of debt maturities in the future. However, the benefits will be limited in the next few years given the high level and frequency of debt maturing.

Going forward, the government may pursue a range of financing options, including international US dollar bond issuance, yuan and yen-denominated bond issuances, and loans from China (A1 stable), the Middle East or other bilateral and multilateral lenders. These options may somewhat mitigate but are unlikely to materially reduce refinancing risks, as ongoing tightening in financing conditions raise uncertainty around the timing and availability of funding sources.

The government aims to increase its funding from the domestic market, as domestic Treasury bond maturities are lower in coming years. But although funding from the domestic market can reduce exchange rate risk, given that local currency interest rates are much higher than the average cost of total external government debt (including concessional debt), a switch to domestic financing would involve a rise in the overall cost of debt from already elevated levels.

VOLATILE DOMESTIC POLITICAL CONDITIONS UNDERMINE INSTITUTIONAL STRENGTH

A steady and credible implementation of planned fiscal and economic reforms would improve Sri Lanka's ability to sustain investor confidence through the upcoming period of large debt maturities. However, the likelihood of the government pursing its reform agenda on the previously planned schedule has fallen following recent political events that have interrupted the reform momentum. Moody's does not expect the current political crisis to be fully resolved rapidly, and the crisis is in any event likely to leave its mark on the pace and content of the reform programme. Even if past episodes of political disruption have not changed the broad direction of reforms in Sri Lanka, delays in the pace of reform will at a minimum limit the government's ability to respond to changing market conditions.

SLOWER FISCAL CONSOLIDATION TO KEEP GOVERNMENT DEBT HIGHER FOR LONGER

Sri Lanka's large government debt burden and weak debt affordability -- along with sizeable external and foreign currency borrowing needs, lower capital inflows and higher financing costs -- weigh on Sri Lanka's already very low fiscal strength and broader credit profile.

In the face of continued political strife and disruption to fiscal and economic policy making, fiscal consolidation efforts are likely to resume only slowly. Moody's expects fiscal deficits to gradually narrow below 5% of GDP in the coming years and the government's debt burden to continue to decline. However, government debt will remain above 75% of GDP in 2020, from about 77% of GDP in 2017, higher than Moody's previously expected and higher than many B-rated sovereigns. Even that progress will rely heavily on the successful implementation of durable revenue reforms and expenditure restraint, the risks associated with which have risen in recent weeks.

As a result, Moody's expects government gross borrowing requirements, incorporating projections on fiscal deficits and maturing government debt repayments, to reach about 19% of GDP in 2018. Although Moody's expects them to fall to around 15% by 2020, that remains a high level -- and higher than at the time of July's affirmation -- particularly given the low coverage of reserves and consequently the high and rising EVI.

In the meantime, interest payments will continue to absorb about 40% of government revenue, much higher than most B-rated sovereigns because of Sri Lanka's high debt burden and significant borrowing requirements, as well as its low, albeit gradually rising, revenue base.

Sri Lanka's newly appointed Prime Minister Mahinda Rajapaksa, who lost two motions of no confidence last week, may lose his government's budget even as he clings to power.

Lawmakers opposed to Rajapaksa said they intend to remove funding for staff salaries and other costs in a vote on Nov. 29. The opposition, which regards his administration as illegitimate, will also seek approval to slash the government's overall budget, they said.

It was the latest of several new twists on Monday in the political chaos that has embroiled Sri Lanka for the past few weeks.

Leaders of political parties backing Rajapaksa and President Maithripala Sirisena refused to allow a third motion of no confidence to be held through name call or electronic voting on Monday. The previous two motions passed through a voice vote but Sirisena said they hadn't followed the proper procedures. Sirisena appointed Rajapaksa last month  after firing Ranil Wickremesinghe as prime minister, setting off the political turmoil on the island off India's southeast coast.

Rajapaksa is seen as a close ally of China, though Beijing has denied accusations that it was instrumental in getting him appointed.

Dinesh Gunawardene, a Rajapaksa loyalist, said Wickremesinghe's coalition had handed a motion ‘to suspend all government expenses’ to the speaker and the parliament secretary.

‘According to the previous no confidence motions, both Rajapaksa and his government are out. There is no government, but there are MPs,’ M.A. Sumanthiran, a lawmaker who had voted for the no confidence motion, told Reuters.

‘The finance of the country is under the control of the parliament. Now we have proposed a motion to stop government finances for the prime minister's office,’ he said.

Ananda Kumarasiri, the deputy speaker of the parliament, established a select committee to carry on parliamentary business before adjourning the house to Nov. 23.

Unlike last Thursday and Friday there were no physical altercations on the floor of parliament on Monday. On Friday, lawmakers supporting Rajapaksa threw books, chili paste and water bottles at the speaker to try to disrupt the second vote.

Speaker of Parliament Karu Jayasuriya said in a statement that investigations have begun into Friday's events, including damage that was done to public property in the melee.

The political crisis has hit the economy. On Monday, the rupee fell to a record low of 177.20 per dollar. Foreign investors have pulled out more than 30 billion rupees ($169.5 million) since the crisis unfolded on Oct. 26.

Wickremesinghe loyalists allege that Rajapaksa's party is trying to buy lawmakers for as much as $3 million each. Rajapaksa loyalists have rejected the allegation.

Both Sirisena and many Rajapaksa loyalists have said they have the majority in parliament. However, the no confidence motion against Rajapaksa and his government was passed twice by 122 votes in the 225-member parliament.

Most foreign countries, including Western nations, have yet to recognise Rajapaksa as the prime minister.

Last week, eight Western countries stayed away from a meeting with the government to register their protest against Sirisena's decision to dissolve parliament. (Reuters)

Inspector General of Police Pujith Jayasundara has withdrawn the transfer of OIC Nishantha Silva who was ordered to be transferred from the CID on Sunday (Nov 18).

The National Police Commission (NPC) ordered the transfer of  Nishantha Silva, who was in charge of several high profile investigations, to be cancelled.

After the NPC intervened, IGP Pujith Jayasundara withdrew the transfer of Silva, who also handled the Lasantha Wickrematunga murder case and was also the main officer investigating the abduction and murder case of 11 youths by an alleged Navy abduction racket.  

UNP Leader Ranil Wickremesinghe said that the Police Commission's intervention to cancel the transfer of IP Nishantha Silva symbolises the functioning of strong democratic institutions against arbitrary and tyrannical moves of the Executive.

Meanwhile, Chief of Defence Staff Admiral Ravindra Wijegunaratne, who had allegations of harbouring a wanted person with regard to the abduction of 11 youths, had reportedly stated that Nishantha Silva was an agent working for the LTTE. However, a police investigation conducted by the CID came to the conclusion that the claim made by the Chief of Defence against the Nishantha Silva was nothing but an utter lie, senior DIG in charge of the CID Ravi Seneviratne said in statement.

The All Ceylon Makkal Congress (ACMC) hailed the Speaker of parliament, Deshamanya Karu Jayasuriya, for his courageous stand 'against anti-democratic forces'. ACMC also called to initiate a high-level inquiry on the unruly behaviour witnessed in parliament. 

Issuing a statement, ACMC said that this sort of violence was the most shameful conduct seen in our parliament to-date and a red letter day for the decorum in Parliament.

 The party paid a tribute to Speaker Jayasuriya for saving Sri Lanka’s Democracy from the 'brink”.   

Leader of ACMC, Rishad Bathiudeen MP, strongly condemned the attacks made on the Speaker and called for a high level inquiry on the conduct of legislators.

 "ACMC has always stood up for individual freedom as well as the free and fair conduct of MPs. That is a cornerstone of parliamentary democracy that has never been violated since independence", he said.  

 "Therefore, violent events in Parliament has brought the August Assembly to its lowest point in history since independence and with it, international disrepute”, ACMC leader Bathiudeen added.

The CID Star witness of the Navy abduction for ransom case against a group of Naval Officers Lt. Commander Krishan Welagedara is said to be in imminent danger after the Navy this week decided to transfer one of the main accused in the case Commander Sumith Ranasinghe back to the Naval Headquarters in Colombo. Under the transfer which took effect on Monday, Commander Ranasinghe has been appointed by the Navy Commander Sirimevan Ranasinghe as the Director of Naval Land Operations. While Welagedara was given additional security following his support in the CID investigations to the abduction of 11 youth by a group of Naval officers in 2009 for extortion purposes, this security detail will now be directly reporting to Ranasinghe causing grave concerns regarding the safety of Welagedara. 

The latest move comes after the current illegal government backed by President Maithripala Sirisena's attempt to remove leading investigator of the case IP Nishantha Silva, OIC of the Gang Robbery Unit of the CID from his post by transferring him to Negombo division. It is one of the areas that may have posed a great risk to the life of Silva due to underworld related investigations done by him. However, bowing down to pressures of media and civil society this transfer was later withdrawn by the IGP himself. Sources say all these attempts are to shield CDS Ravindra Wijegunaratne whose arrest has been ordered by courts for his connection to the case.

Transparency International Sri Lanka observed with shock and dismay, the behavior of Members of Parliament over the past week. TISL wishes to highlight that in law, parliamentary privileges are not a cloak for criminal behavior. TISL is also concerned by the behavior of MPs towards law enforcement authorities on the premises of the parliament, showcasing a pervasive culture of impunity and total disregard of the rule of law.  

TISL wishes to bring to the attention of the public and the relevant authorities, the provisions in law which enable action to be taken in such cases. Whilst the conduct of certain MPs as witnessed in parliament on the 14th, 15th and 16th of November amounts to blatant violations of the code of conduct adopted in April 2018, attempts to sabotage parliamentary proceedings also constitute offences under the Parliament (Powers & Privileges) Act.  

The schedule of the Act clearly outlines that incidents of assault, threat, intimidation and disobedience, as witnessed over the past week, constitute offences under the law and are punishable by a sentence of up to 2 years. TISL calls on the members of parliament to petition the Speaker to use his statutory power to make a reference to the Attorney-General on the conduct of errant MPs. It is based on this report of the Attorney General that legal proceedings can commence before the Supreme Court.  

TISL feels it important to emphasize that the freedom from arrest of Parliamentarians is only applicable for what they have said and for matters ‘brought before Parliament by petition, bill, resolution, motion or otherwise’. Any action of assault can give cause for legal proceedings to be initiated against a Member of Parliament. TISL Executive Director Asoka Obeyesekere said, “The entire country watched with dismay as their elected representatives were reduced to acts of thuggery and intimidation. At this crucial juncture it is imperative that all law enforcement agencies display independence and send a clear message to those who seek to disregard the law”. 

Obeyesekere added, “We are yet to see any action taken by the Commission to Investigate Allegations of Bribery or Corruption regarding the complaint filed by TISL over allegations of bribery of members of parliament. We are mindful that complacency on the part of Law enforcement agencies will cause irreparable harm to public faith in the rule of law and the institutions of democracy”.   

TISL calls on the President, the Speaker, the Chief Whips, party leaders and all members of parliament to ensure that steps are taken to hold offenders to account and deter the recurrence of such behaviour.

The Bishop of Colombo, Dhiloraj Canagasabey, has responded “with shock and great dismay” to the “arbitrary” removal of Sri Lanka’s Prime Minister and the dissolution of the country’s Parliament. President Maithripala Sirisena sacked Prime Minister Ranil Wickremesinghe three weeks ago, replacing him with Mahinda Rajapaksa.

He then suspended Parliament for two weeks – it resumed sitting on Monday – and also announced that it would be dissolved from midnight tonight (Friday). But that decision was suspended by the country’s Supreme Court after supporters of the deposed Prime Minister sought a judicial review.

Over the past two days, the sittings have been disrupted by clashes between MPs. Security staff and police broke up scuffles today in which chilli powder was thrown.

Writing on behalf of the Diocese of Colombo, Bishop Dhiloraj described the President’s actions as “arbitrary” and said that it “appears to us to be a direct and blatant violation of the clear and express provisions of the Constitution”.

He said: “the dismissal of a sitting Prime Minister, the appointment of a new Prime Minister, the prorogation of Parliament by the President followed by credible accounts of inducements to MPs to crossover and the shifting stories about the premiership being offered to other members of Parliament are further compounded by this latest action of the President underscoring the fact that the newly appointed Prime Minister did not command the confidence of Parliament.

“All these events showcase the sad depths to which ethical and moral standards have deteriorated in this country, despite our external show of religiosity.”

He continued: “The intellectual dishonesty and moral bankruptcy of many of our politicians and especially that of senior politicians of the two major parties is a terrible indictment on the quality of leadership that we have produced in post independent Sri Lanka.

“The events of the past weeks have been utterly shameful and sullied the name of our country internationally. At a time of economic difficulty, the administration has been further paralysed and the attention of the country diverted to shallow politicking.”

He said that the Diocese of Colombo was “calling on all our members to uphold the country in prayer, seeking God’s mercy, guidance and direction [and] affirms our belief that righteousness, justice and truth will ultimately triumph.”

“We call on the President once again to rise above seeking petty political advantages and to abide by the very solemn promises he made on more than one occasion to uphold the rule of law, good governance and to respect the true spirit of democracy as well as his obligation to ensure that the Constitution is respected and upheld.”

Political parties in Sri Lanka decided today to form a select committee to conduct parliamentary affairs following amidst a power struggle set off by President Maithripala Sirisena's controversial decision to remove prime minister Ranil Wickeremesinghe last month.

The decision came a day after an all-party meeting called by President Sirisena to resolve the crisis ended inconclusively.

The crisis erupted when President Sirisena suddenly announced on October 26 that he had sacked prime minister Wickremesinghe and installed ex-strongman Mahinda Rajapaksa in his place.

President Sirisena later dissolved Parliament, almost 20 months before its term was to end, and ordered snap election. The Supreme Court yesterday overturned President Sirisena's decision to dissolve Parliament and halted the preparations for snap polls on January 5.

The House till now has passed two no-confidence motions against Rajapaksa and his government by a voice vote.

The House was convened today morning to conduct a third floor test. Ten minutes later, the House was adjourned till November 23.

When the House was convened, Deputy Speaker Ananda Kumarasiri said the party leaders who met in earlier in the day resolved that a select committee would be appointed to conduct the parliamentary business.

The leaders from Wickremesinghe's United National Front, Tamil National Alliance and the JVP or the People's Liberation Front discussed the proposal by President Sirisena made at the all party meeting to have a floor test by name or electronic vote for the third motion of no trust against Rajapaksa.

Mano Ganesan, one of the leaders who attended the meeting, said the United People's Freedom Alliance (UPFA of President Sirisena and Rajapaksa) "flatly refused and backtracked" on the proposal.

During today's session, Dinesh Gunawardena on behalf of the disputed government of Mr Rajapaksa asked the deputy speaker that since they were the government they should have the majority in the select committee.

JVP leader Anura Kumara Dissanayake argued that since the Rajapaksa government had not proved their majority the select committee should have a majority of members from the group that commands majority.

Today's session was conducted peacefully. Last week Sri Lanka's parliament witnessed unprecedented violence as lawmakers threw furniture and chilli powder at each other.

The public and VIP gallery were shut today for diplomats on a request by Rajapaksa's United People's Freedom Alliance (UPFA). The security was also tightened to prevent any incident, officials said.

Last week, the top court issued a temporary order against President Sirisena's sacking of parliament with hearing of the case fixed for early December.

After the temporary order, Speaker Karu Jayasuriya reconvened parliament the sittings of which had been suspended by President Sirisena till November 14.

Jayasuriya's decision not to recognise Mahinda Rajapaksa as the prime minister until a floor test is held has angered President Sirisena.

The Sri Lankan rupee fell to an all-time low of 177.35 per dollar on Monday, as political uncertainty outweighed the positive impact of a policy rate hike, sources said. 

Stocks closed weaker for the second straight session due to political uncertainty and the policy rate hike.

The Treasury has been pushed into a catch-22 situation relating to the 2019 budgetary process following three weeks of political uncertainty without clear direction.

The 2015 history is going to be repeated once again, as the Finance Ministry officials have been compelled to prepare a 3-month vote on account under the present situation of political instability, a senior Treasury official disclosed.

If the political impasse continues further without a settlement for few more weeks, then the Finance Ministry has to consider another option, he said.

A vote on account will have to be presented in Parliament in January 2019 to implement special measures to provide relief to the people, similar to action taken under the 100-day programme of good governance government in 2015, he added.

If this move is defeated in Parliament, the President has powers under the Constitution to sanction payments for public services including salaries of public sector employees and the general election expenditure withdrawing money from the government consolidated fund for three months, the official said.

However under the present volatile political environment, anything is possible, he said emphasising that this is a terrible experience for public servants.

According to Treasury statistics, the Consolidated Fund has been overspent to the tune of around Rs. 250 billion at present.

No money from state institutions including state owned enterprises is forthcoming to the fund and the Treasury cannot resort to borrowings to swell the Consolidated Fund, he revealed adding that the sudden dissolution of parliament without passing a vote on account has pushed the country into a financial crisis.

(Sundaytimes.lk)

Ahimsa Wickrematunge, the daughter of the late journalist Lasantha Wickrematunge, who was shot dead in broad daylight during the Rajapaksa regime, condemned the decision to transfer a leading CID investigator that was involved in many high profile cases, including the investigation into her father's murder.

It was reported that the lead investigator and the OIC of the CID's Gang Robbery Branch,  IP Nishantha Silva, a cop with a stellar track record who was responsible for closing many high profile cases, was ordered to be transferred as per the directions given by Maithripala Sirisena to the IGP.

In a strongly worded letter addressed to president Sirisena, she stated that if the president fails to reverse this decision, he will forever be remembered as the person who tried to stop some of the most high-profile criminal investigations in the country.

"Make no mistake, Mr. President. If you try to stand in the way of justice for my father and other victims of brutality, you will fail", she added.

Letter sent to president Sirisena is found below.

There may be consequences for current and future defence and security projects between Sri Lanka and the United States if the Sri Lankan government does not uphold the law and democratic principles, the US Embassy said.

In August, the US State Department announced it would provide $39 million – pending Congressional approval – to the Sri Lankan military.

The funding comes as a part of a broader initiative to strengthen security relationships with south and south-east Asian states. The funding is designed to enhance maritime security, humanitarian assistance and disaster response, peacekeeping capabilities and countering transnational crime capabilities in these countries.

The US also handed over an ex-US Coast Guard cutter to the Sri Lanka Navy in August. Once recommissioned, the 115m vessel would be the largest ship in the Lankan fleet.

“This is obviously a critical time for the country and the United States is paying acute attention to unfolding events,” US Embassy spokesperson David J. McGuire said.

“With regard to ongoing or future projects and funding, we do not want to prejudge how the current political situation may be resolved and it is too soon to speculate on what consequences may come as a result. “There is so much at stake,” he continued. “Sri Lanka has made great gains in terms of security, prosperity, and reconciliation. The US will continue to urge President Sirisena to reconvene parliament immediately to allow the democratically elected representatives of the Sri Lankan people to fulfill their responsibility to affirm who will lead their government.”

Separately, the US Embassy in Colombo said firmly: “President Sirisena’s decision to dissolve the parliament poses a vital threat to Sri Lanka’s democratic institutions.” The US State Department also tweeted deep concern “as a committed partner of Sri Lanka” after parliament was dissolved.

The US has actively engaged with Sri Lanka on security and military collaboration since the end of the civil war in 2009. The US, Japan and Australia have increased their military diplomacy with Sri Lanka.

Along with India, they have all expressed concern regarding Chinese investment into Sri Lankan strategic infrastructure, especially the maritime infrastructure such as Hambantota Port.

The government of President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe had issued assurances that Sri Lanka would remain neutral.

US foreign policy towards Sri Lanka considerably improved from January 2015, with more direct military-to-military exercises, exchanges and training programs. The US Marine Corps played an instrumental role in the genesis of the Sri Lankan Navy Marine Battalion last year.

The participation of senior US, Japanese and Australian military leadership at key Sri Lankan defence and security seminars during the last two months underscores the importance the countries have placed on ties with Sri Lanka. (Sunday Times)

Except for the heading, this article has not been edited.