Sri Lanka constrained by debt – Fitch
View(s):Sri Lanka’s ‘CCC+’ sovereign rating remains constrained by elevated general government indebtedness and a high interest-revenue ratio despite completion of the sovereign’s debt restructuring in 2024, Fitch Rating said on Thursday
It has affirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC+’.
It said in a statement that sustained adherence to a path of reforms is facilitating a solid economic recovery, low inflation, a substantial fiscal adjustment, and improvements in the external finance position, Fitch said in a media release.
Substantial progress has been made under the 48-month IMF programme. Momentum includes passage of the 2025 budget in March in line with programme targets, and restoration of cost-recovery pricing for electricity. Additional measures include greater tax compliance and revenue administration, and reforms to the Ceylon Electricity Board and state-owned enterprises. The investment climate, particularly FDI, is likely to be remain a priority – to bolster medium-term growth, albeit with incremental progress.
The Central Bank of Sri Lanka (CB) continues to refrain from monetary financing of the deficit, and exchange-rate flexibility has been maintained. Debt-management functions carried out by CB are gradually being taken over by the Public Debt Management Office (PDMO). Full operationalisation of the PDMO is expected by January 2026.
Debt remains elevated despite the sharp fiscal adjustment and debt restructuring, though Fitch expects gradual debt reduction over the medium term. Fitch forecasts gross general government debt-GDP to reach about 96 per cent in 2027 but will remain well above the ‘CCC’ median of 74 per cent. Risks to the debt outlook remain high over the medium term, particularly after 2027.
Fitch projects interest/revenue to fall to 46.5 per cent in 2027, although this would still be above the 14.3 per cent ‘CCC’ median. “We assume the first threshold of average US dollar GDP under conditions of Macro-Linked Bonds to be triggered due to the economic recovery and stronger exchange-rate assumptions. This would result in higher principal and coupon payments from 2028. We expect this to be accommodated with debt declining if primary surpluses are maintained and GDP growth is sustained at 3.5 per cent in line with our baseline,” the statement said.
Fitch expects primary surpluses of around 2.7 per cent of GDP on average between 2025 and 2027. The surplus reached 2.2 per cent of GDP in 2024 from a primary deficit of 5.7 per cent GDP in 2021, driven primarily by a sharp rise in revenues. The 2025 budget targets an overall deficit of 6.7 per cent of GDP, but Fitch sees a 5.4 per cent deficit owing to lower interest costs and spending under-execution and doesn’t expect further gradual narrowing of the fiscal deficit to 4.2 per cent by 2027 as revenues keep the primary surplus steady and interest costs decline.
Forex reserves in July-August 2025 were about US$ 6.2 billion, up from a low of $ 1.9 billion in 2022. The external liquidity ratio as of end-2024 rose to 96.5 per cent from 55.1 per cent. Fitch expects reserves to rise gradually to $ 6.4 billion by end-2025 on the expectation of the CB continuing to make direct FX purchases while forecasting reserve coverage of current external payments at 2.8 months. Upfront debt relief from restructuring is benefiting external finances.
“We forecast a current account surplus in 2025, having been $ 1.2 billion in 2024 (1.2 per cent of GDP), driven by remittances, receipts from services including tourism, and a slight trade deficit. Remittances were up 19 per cent yoy between January-August 2025,” the statement said.
Fitch said it expects full-year growth at 4.4 per cent, with 3.8 per cent in 2026 and 3.6 per cent in 2027. US tariffs will be a growth headwind, but the revised reciprocal tariff rate of 20 per cent is now in line with peers, reducing risks to exports. Fitch sees low average inflation, but to rise gradually to 5 per cent in 2027, in line with the CB’s inflation target.
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