COLOMBO: International ratings agency Moody’s placed cash-strapped Sri Lanka under watch for a downgrade Tuesday on rising fears that the island could default on its foreign debt.

Foreign reserves of $3.6 billion at the end of June was insufficient to cover Sri Lanka’s annual foreign debt servicing — of $4 billion to $5 billion — over the next four to five years, Moody’s said.

It said Colombo’s financing options were limited although it managed to obtain some bilateral loans.

Colombo has announced a $250 million loan from Bangladesh, a fellow South Asian country with a much lower per capita income than Sri Lanka.

“The decision to place the ratings under review for downgrade is driven by Moody’s assessment that Sri Lanka’s increasingly fragile external liquidity position raises the risk of default,” Moody’s said.

In September, Moody’s downgraded Sri Lanka’s sovereign credit rating by two notches to “Caa1” (high credit risk), saying Colombo would struggle to secure funding to service its large debt.

In a desperate bid to save foreign exchange, Sri Lanka has banned luxury imports, including some food and spices, since March last year.

“Moody’s expects Sri Lanka’s foreign exchange reserves to continue declining from already low levels, further eroding its ability to meet sizeable and recurring external debt servicing needs,” the agency said.

Sri Lanka’s finance ministry reacted angrily to Moody’s latest announcement saying it was “unwarranted”, and warned it could reconsider employing the ratings agency.

“The unwarranted announcement by Moody’s... re-emphasises the need for the Sri Lanka government to revisit its relationship with rating agencies,” the finance ministry said in a statement.

Sri Lanka’s central bank governor W.D. Lakshman said last month that the country would meet its debt obligations.

The economy shrank a record 3.6 percent last year on the back of lockdowns sparked by the Covid-19 pandemic. However, the central bank expects growth of 4-5 percent this year with the gradual reopening of the economy and the roll-out of a vaccine programme.