S&P Global Ratings has maintained its ‘CCC+/C’ sovereign credit ratings for Sri Lanka, with a stable outlook that reflects the country’s ongoing economic recovery amid increased external risks. Despite significant revenue growth and real GDP performance that surpassed forecasts in early 2026, Sri Lanka’s creditworthiness remains at risk due to elevated debt levels and a substantial interest-to-revenue ratio, projected at 45.6% for the current year. The stable outlook is supported by enhanced political stability and policy consistency following the 2024 general elections, although ongoing external challenges stemming from the conflict in the Middle East and the repercussions of Cyclone Ditwah may temporarily undermine the nation’s external financial position and impede the accumulation of foreign reserves. Additionally, S&P has upgraded Sri Lanka’s transfer and convertibility assessment from ‘CCC+’ to ‘B-‘, indicating improved conditions for accessing foreign exchange.
In its announcement, S&P noted that Sri Lanka’s economy has shown resilience amidst various external shocks, with strong revenue growth aiding in fiscal recovery and a gradual decrease in the government’s debt servicing costs. However, the nation’s external position could face deterioration this year due to rising import costs and the adverse effects of the Middle East conflict on remittances and tourism revenues, potentially hindering the replenishment of reserves. As a result, S&P has confirmed its sovereign credit ratings for Sri Lanka at ‘CCC+/C’ with a stable outlook, reflecting expectations that robust economic growth and revenue increase will help mitigate some external uncertainties.
The stable outlook suggests that conditions conducive to ongoing economic growth and fiscal improvement in Sri Lanka are likely to persist over the next six to twelve months, despite anticipated deceleration in economic growth and a return of current account deficits. Significant risks to external demand, inflation, and financing conditions remain, indicating that substantial enhancements to sovereign credit support are unlikely during this period.
Should signs of renewed funding and liquidity pressures emerge, S&P could downgrade Sri Lanka’s ratings. Indicators of such risks could include marked declines in external or fiscal performance leading to funding challenges. Conversely, an upgrade could occur if economic growth continues to drive improvements in the country’s external and fiscal metrics, enabling the government to build credit reserves and manage repayment obligations more effectively.
The ratings reflect the view that Sri Lanka’s creditworthiness is fragile and reliant on favorable financial and economic conditions, although the government is not currently facing an immediate credit or payment crisis. High government debt levels and a significant interest burden, constituting approximately 45% of revenues, contribute to this vulnerability. Recent external shocks, including Cyclone Ditwah and the ongoing conflict in the Middle East, have temporarily strained Sri Lanka’s external and fiscal balances.
Expectations of continued official financing will assist the government in meeting its financial obligations, while the country’s economic recovery and structural reforms should support fiscal and external improvements. However, heightened energy and input costs could hinder growth in the short term, primarily due to disruptions in supply chains stemming from the Middle East conflict. Although these challenges may dampen tourism and remittance inflows, the government’s proactive measures to secure essential supplies are expected to mitigate longer-term impacts on economic activity.
Following the 2024 general elections, political stability and policy predictability have seen improvement. The National People’s Power (NPP) party secured a strong mandate, which contrasts with the historical political fragmentation in Sri Lanka. This newfound stability may foster a more predictable policy environment, although a longer-term demonstration of institutional improvements is necessary.
In alignment with the International Monetary Fund (IMF) Extended Fund Facility program, the government is poised to continue its reform initiatives, including efforts towards revenue-based budget recovery and cost-recovery pricing for utilities. The commitment to the IMF program has been strong, with the government fulfilling most quantitative indicators and structural benchmarks, despite some delays.
While revenue growth remains robust, increased spending related to reconstruction and subsidies is expected to widen the fiscal deficit this year. The government’s debt remains high, with an exceptionally heavy interest burden, compounded by a deteriorating external position due to surging import costs and heightened currency volatility. Nevertheless, Sri Lanka’s fiscal situation has improved markedly since 2022, bolstered by various revenue measures and strong economic performance.
In 2025, revenue surged 34% to 16.7% of GDP, leading to a fiscal deficit of 2.3% of GDP and a primary balance that reached a record 5.4%. This revenue growth trend has continued into 2026, supported by a broad-based recovery in economic activity and new revenue measures, including the introduction of a property tax. However, higher expenditures related to post-disaster relief and subsidies are projected to widen the fiscal deficit to 5% of GDP this year, before narrowing to 4% by 2029.
Despite these challenges, the government’s debt servicing burden is expected to decrease due to robust revenue growth and the winding down of expensive debt accrued in 2022. Although the interest-to-revenue ratio remains elevated, it is anticipated to improve to 39% by 2029 from 64% in 2024. The forecast for net government debt, including state-owned enterprise guarantees, stands at approximately 92% of GDP for 2026, with expectations of a decline to 83% by 2029.
As the external outlook grows more complicated due to rising import bills and uncertainties from the ongoing Middle East conflict, inflation has surged due to the energy crisis, though this supply-driven inflation is likely to be temporary. Sri Lanka’s monetary policy remains a credit weakness, but improvements in policy credibility are expected with a longer history of policy autonomy following the enactment of the Central Bank Act in 2023.
Remittances and tourism revenues have shown resilience, although risks remain if the Middle East conflict continues. The current account is expected to shift to a deficit of 1.7% of GDP in 2026, with external financing needs anticipated to widen. Nevertheless, government actions to stabilize the currency and enhance remittance inflows may help alleviate some of the pressures on the trade balance.
Overall, while Sri Lanka’s economic growth is projected to moderate to 3.8% in 2026, with a rebound to 4.2% in 2027 as energy supply chains normalize, the country appears to be on a path towards recovery, indicating resilience in the face of ongoing challenges.
