Fitch affirms Sri Lanka at ‘CCC+’

• Reserves forecast to reach $ 6.4 b by end-2025
• GDP growth projected at 4.4% in 2025, easing to 3.8% in 2026 and 3.6% in 2027
• Primary surpluses expected to average 2.7% of GDP during 2025–2027
• Govt. debt/GDP ratio forecast at 96% in 2027, with interest/revenue falling to 46.5%
• Macro-Linked Bonds: first GDP threshold expected to trigger by 2028, raising principal and coupon payments
• Debt sustainability hinging on maintaining primary surpluses and 3.5% growth

Fitch Ratings yesterday affirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC+’. Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.

The ratings agency said Sri Lanka’s ‘CCC+’ sovereign rating remains constrained by elevated general Government indebtedness and a high interest-revenue ratio despite the completion of the sovereign’s debt restructuring in 2024.

“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 statement yesterday.

It noted substantial progress Sri Lanka has made under the 48-month IMF program.

Momentum includes passage of the 2025 budget in March in line with program 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 remain a priority to bolster medium-term growth, albeit with incremental progress, Fitch noted.

The Central Bank of Sri Lanka (CBSL) continues to refrain from monetary financing of the deficit, and exchange-rate flexibility has been maintained. Debt-management functions carried out by CBSL are gradually being taken over by the Public Debt Management Office (PDMO).Full operationalisation of the PDMO is expected by January 2026.

Fitch said debt remains elevated despite the sharp fiscal adjustment and debt restructuring, though we expect gradual debt reduction over the medium term. Fitch forecasts gross general Government debt-GDP to reach about 96% in 2027, but will remain well above the ‘CCC’ median of 74%. Risks to the debt outlook remain high over the medium term, particularly after 2027.

Fitch projects interest/revenue to fall to 46.5% in 2027, although this would still be above the 14.3% ‘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% in line with our baseline,” the ratings agency said.

Fitch expects Sri Lanka’s primary surpluses to be around 2.7% of GDP on average between 2025 and 2027. The surplus reached 2.2% of GDP in 2024 from a primary deficit of 5.7% GDP in 2021, driven primarily by a sharp rise in revenues. The 2025 budget targets an overall deficit of 6.7% of GDP , but we see a 5.4% deficit owing to lower interest costs and spending under-execution. We expect further gradual narrowing of the fiscal deficit to 4.2% by 2027 as revenues keep the primary surplus steady and interest costs decline.

Fitch said revenues rose 27% yoy between January-July 2025. Tax revenues - nearly 93% of total revenue - were up by 28% yoy. Revenue gains are also due to the revenue-raising measures announced and implemented. We forecast revenue/GDP at 15.2% and stabilisation at 15.3% over 2026-2027, still lower than the ‘CCC’ median average of 22.5%, reflecting frontloading of revenue gains under the IMF program. Additional revenue-enhancing measures in the pipeline are an upside to our projections.

Fitch noted Sri Lanka’s stable external finances. FX reserves in July-August 2025 were about $ 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% from 55.1% in 2022.

“We expect reserves to rise gradually to $ 6.4 billion by end-2025 on the expectation of the CBSL continuing to make direct FX purchases. We forecast reserve coverage of current external payments at 2.8 months. Upfront debt relief from restructuring is benefiting external finances,” Fitch noted.

Fitch forecasts a current account surplus in 2025, having been $ 1.2 billion in 2024 (1.2% of GDP), driven by remittances, receipts from services including tourism, and a slight trade deficit. Remittances were up 19% yoy between January-August 2025.

Fitch said the economy was showing signs of stabilisation after the 2022-2023 contraction, up by 5% in 2024 and 4.8% in 1H25. Growth in 1H25 was supported by industry and services, up by 7.9% and 3.3% yoy, respectively.

“We expect full-year growth at 4.4%, with 3.8% in 2026 and 3.6% in 2027. US tariffs will be a growth headwind, but the revised reciprocal tariff rate of 20% is now in line with peers, reducing risks to exports. We see low average inflation, but to rise gradually to 5% in 2027, in line with the CBSL’s inflation target,” Fitch said.

It said Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in Fitch’s proprietary Sovereign Rating Model (SRM). Sri Lanka has a medium WBGI ranking in the 38th percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.