Economic recovery enters new phase

Sri Lanka has received an important vote of confidence from the international financial community. Fitch Ratings has upgraded the country’s long-term foreign-currency sovereign rating from CCC+ to B-, with a ‘Stable Outlook’. The move is significant not because B- represents the end of Sri Lanka’s economic troubles, which it plainly does not, but because it marks a substantial distance travelled from the depths of the 2022 crisis. Fitch’s rating had fallen to ‘Restricted Default’ after the sovereign default and returned to CCC+ following the completion of the international bond restructuring in 2024.

The distinction matters. Fitch describes CCC as indicating substantial credit risk, with a very low margin of safety and default a real possibility. Its B category remains speculative and carries material default risk. In other words, Sri Lanka has not suddenly become a low-risk borrower. But moving from CCC+ to B- signals that the country’s capacity to manage its finances and meet its obligations is now viewed more favourably than it was only a short time ago.

Fitch attributes the upgrade to the implementation of macroeconomic stabilisation policies and structural reforms. It points specifically to improvements in fiscal and external balances, stronger revenue mobilisation, primary budget surpluses and a gradual rebuilding of foreign-exchange reserves. The agency nevertheless cautions that Government debt and debt-servicing burdens remain high and that reserve buffers are still modest.

That combination of progress and caution is perhaps the right way for Sri Lanka itself to view the development. The lesson of the crisis was not merely that Sri Lanka needed more foreign currency. It was that public finances, debt management, taxation, monetary stability and external reserves cannot be treated as secondary concerns when political pressures become intense. The recovery has therefore depended on difficult adjustments that created fiscal space and restored a measure of credibility.

The IMF program has been central to that process. The current Extended Fund Facility, approved in 2023, is scheduled to expire in March 2027. The IMF has said that program performance has generally been strong, while also stressing that Sri Lanka must maintain fiscal discipline, strengthen revenue collection, improve public financial management and preserve reforms.

The eventual completion of the program should therefore be welcomed as a sign of greater economic self-reliance. But it should not be interpreted as liberation from the principles that made the recovery possible.

There has historically been considerable suspicion of the IMF in Sri Lanka, and not without reason. Earlier generations experienced programs associated with painful adjustment, including reductions in subsidies and other measures whose social consequences could be severe. But the present circumstances are different. The modern IMF program is not simply an instruction to cut spending. Its Sri Lankan program encompasses fiscal and debt sustainability, protection of vulnerable groups, financial stability, rebuilding external buffers, governance reforms and measures intended to support longer-term growth.

Sri Lanka should therefore approach IMF advice pragmatically rather than ideologically, neither treating it as infallible nor rejecting it simply because it comes from abroad. Good advice should be accepted because it is good policy, not because it carries the IMF’s imprimatur.

That will become increasingly important as the country moves beyond the program. External supervision can provide discipline, but, ultimately, sustainable economic management must become an internal political and institutional commitment.