Amid political crisis, Sri Lanka's largest party flags risk of debt default

The political unrest also saw the IMF suspend a tranche of a $1.5-bn bailout loan agreed to in 2016

Sri Lanka's largest party warned on Tuesday that the island could default on its debt as Moody's slashed its credit rating and a bitter power struggle dragged into the fourth week.  

The South Asian nation has been gripped by an unprecedented political crisis since the president sacked his prime minister on October 26 and appointed former strongman Mahinda Rajapakse in his place.

Ranil Wickremesinghe, the ousted premier and leader of the United National Party -- the largest single party in parliament -- refused to step down, declaring his sacking illegal.

President Maithripala Sirisena then dissolved parliament and called snap elections for January 5 -- a decision later suspended by the Supreme Court. 

The parliament, restored by court order, voted twice to topple Rajapakse last week but he has also refused to step down, leaving Sri Lanka without a government since November 15.
 

Mangala Samaraweera, a member of Wickremesinghe's party who served as finance minister until the chaos broke out, said he was worried the crisis could lead the country into an "economic abyss".

"If we don't have a budget approved unveiled in the next few weeks, the government will not be able to spend any money from January 1, 2019," he told reporters in Colombo.

International ratings agency Moody said its decision to downgrade Sri Lanka's credit rating from B1 to B2 reflected external and internal issues, which were "exacerbated most recently by a political crisis which seems likely to have a lasting impact on policy even if ostensibly resolved quickly."
 

A credit downgrade means Sri Lanka would have to pay more by way of interest on its foreign borrowings, because of a greater risk of default.

The political unrest also saw the International Monetary Fund (IMF) suspend a tranche of a $1.5-billion bailout loan agreed to in 2016. 

Samaraweera said there was a serious risk of the country defaulting on a $1-billion sovereign bond that matures on January 10.
 

"We are now in uncharted territory," he said. "We have never been in a situation where we were unable to meet our foreign debt."