Wednesday Apr 22, 2026
Wednesday Apr 22, 2026
Wednesday, 22 April 2026 00:00 - - {{hitsCtrl.values.hits}}
Fitch Ratings has said that Sri Lanka’s recovery remains fragile despite improved macroeconomic fundamentals, with the Middle East energy shock now testing the gains achieved through stabilisation and reforms.
In its latest Sri Lanka update on credit development, Fitch said growth is expected to slow, inflation to rise and the fiscal deficit to widen in 2026, even as the economy builds on stronger fundamentals following the 2022 crisis. GDP growth is forecast to ease to 3.7% from 5% in 2025, while inflation is expected to increase to 6% after deflation of 0.5% in 2025.
Fitch said Sri Lanka’s ‘CCC+’ rating remains constrained by high Government debt and elevated interest burdens despite the 2024 restructuring, while warning that external shocks, particularly from higher energy prices, could weigh on growth, inflation and external balances. It noted that while macroeconomic stabilisation has improved resilience compared to 2022, the economy remains exposed to energy price shocks and external risks.
The update is as follows:
High debt, improving fundamentals: Sri Lanka’s ‘CCC+’ rating is constrained by elevated general Government indebtedness and a high interest/revenue ratio even after the sovereign’s 2024 debt restructuring. Sustained reform momentum is supporting a solid economic recovery, low inflation, a substantial positive fiscal adjustment, and improvements in external finances. Prolonged energy supply and price disruptions could pose downside risks to credit metrics, but the country is in a better position to manage pressures than in the 2022 energy shock.
GDP growth to slow: The economy remained robust in 2025 with GDP growth of 5.0%, in line with 2024, supported by the ongoing cyclical recovery from the 2022 shock. Fitch forecasts growth to ease to 3.7% in 2026 as the inflationary impact of the energy shock and related fuel conservation measures weigh on growth in 1H26. Fitch expects CPI inflation of 6% in 2026 after deflation of 0.5% in 2025, led by primary and secondary impacts of higher energy inputs and base effects.
Risks from energy shock: Sri Lanka is highly exposed to the energy shock from the Middle East conflicts as a net energy importer with a reliance on imports and remittances from the Gulf. A downside scenario of a prolonged closure of the Strait of Hormuz with oil averaging $ 100 per barrel in 2026 would bring substantial risks for GDP growth, inflation and external finances. However, macro-stabilisation policies in recent years have improved resilience, with a starting point of solid GDP growth, low inflation, and primary fiscal and current account surpluses.
IMF program on track: The IMF program and broader multilateral financing continues to underpin Sri Lanka’s external financing profile. Sri Lanka reached a staff-level agreement with the IMF and concluded the fifth and sixth review tranches, which should provide about $ 700 million in financing by end-May. This comes on top of a $ 206 million Rapid Financing Instrument disbursement from the IMF in December. Moreover, Fitch expects support from other multilaterals, including the Asian Development Bank ($ 1.2 billion) and World Bank in 2026.
Current account risks contained: Fitch forecasts the current account to return to a deficit of 0.7% of GDP in 2026 after a 1.6% of GDP surplus in 2025. This is driven by larger imports from higher energy costs and materials for reconstruction following Cyclone Ditwah. Remittances have been a major source of inflows, surging nearly 23% in 2025. Fitch expects remittance flows to be steady in 2026. A prolonged conflict in the Middle East could dampen remittances, but reconstruction in Gulf countries following the conflict could boost remittances.
Foreign reserves steady: Fitch expects foreign reserves to remain relatively steady despite the return to a current account deficit as multilateral inflows provide a solid external financing backstop. Its baseline scenario forecasts FX reserves to rise slightly to $ 7.3 billion (2.9 months of current external payments) in 2026 from $ 6.8 billion in 2025.
Improved fiscal balance: Surging revenue collection drove a large improvement in the central Government fiscal deficit to an estimated 2.3% of GDP in 2025 from 6.8% in 2024. Revenue rose sharply to 16.7% of GDP in 2025 from 13.6% in 2024 buoyed by auto import duties and the economic recovery. Fitch forecasts the fiscal deficit to widen to 4% of GDP in 2026 as expenditures rise on the energy shock and cyclone response, with revenues easing as growth slows. Still, Sri Lanka is able to adhere to the 2.3% of GDP primary surplus target in our baseline.
Government debt falling gradually: Debt remains high 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 93% in 2027. Risks to the debt outlook remain high over the medium term, particularly after 2027.
