Fitch Ratings has 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.
A full list of rating actions is at the end of this Rating Action Commentary.
Key Rating Drivers
Ratings Affirmed: 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. 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.
Reforms to Continue: 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 (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.
High Government Debt: 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.
High Interest Burden: 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.
Primary Surplus Sustained: We expect primary surpluses of 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.
Rising Revenues: 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 programme. Additional revenue-enhancing measures in the pipeline are an upside to our projections.
External Finances Stable: FX reserves in July-August 2025 were about USD6.2 billion, up from a low of USD 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 USD6.4 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.
Current Account Surplus: We forecast a surplus in 2025, having been USD 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.
Growth Improving: The economy is 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.
ESG – Governance: 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.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Public Finances/Macro: Inability to sustain reforms, leading to a derailment of the IMF programme or disruption to other external inflows that increases financing pressures.
-External Finances: Inability to rebuild foreign-exchange reserves that weakens debt-repayment capacity.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-Public Finances: A substantial decline in the general government debt/GDP ratio that is underpinned by strong implementation of a credible medium-term fiscal consolidation strategy; growth in fiscal revenue; and faster economic growth.
-Macro: A lengthening record of policy coherence and credibility that supports macroeconomic stability and leads to a reduction in external and fiscal vulnerabilities.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch’s proprietary SRM assigns Sri Lanka a score equivalent to a rating of ‘CCC+’ on the Long-Term Foreign-Currency IDR scale. However, in accordance with the rating criteria, Fitch’s sovereign rating committee has not utilised the SRM and QO to explain the ratings in this instance. Ratings of ‘CCC+’ and below are instead guided directly by the rating definitions.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Debt Instruments: Key Rating Drivers
Fitch removes Sri Lanka’s debt instruments from UCO and affirms them at ‘CCC+’.
Senior Unsecured Debt Equalised: The senior unsecured long-term debt ratings are equalised with the applicable long-term IDR, reflecting Fitch’s expectation of average recovery prospects in a default scenario. A Recovery Rating of RR4 has been assigned to these debt instruments. The RR4 reflects weak public finances, including an elevated general government debt-GDP ratio.
Country Ceiling
The Country Ceiling for Sri Lanka is affirmed at ‘B-‘. Fitch assumes a starting point of ‘CCC+’ to determine the Country Ceiling for sovereigns rated ‘CCC+’ and below. Fitch’s Country Ceiling Model produced a starting point uplift of zero notches above the IDR.
Fitch applied a +1 notch qualitative adjustment to the model result, under the balance of payments restrictions pillar. The Country Ceiling reflects Fitch’s view that the private sector has not been prevented or significantly impeded from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Climate Vulnerability Signals
The results of our Climate.VS screener did not indicate an elevated risk for Sri Lanka.
ESG Considerations
Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Sri Lanka has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Sri Lanka has an ESG Relevance Score of ‘5’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Sri Lanka has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.
Sri Lanka has an ESG Relevance Score of ‘4’ for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Sri Lanka has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Sri Lanka has an ESG Relevance Score of ‘4’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Sri Lanka as for all sovereigns. As Sri Lanka had a recent event of default on public debt in 2022, this has a negative impact on the credit profile.
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit
www.fitchratings.com/topics/esg/products#esg-relevance-scores.