S&P Global Ratings has upgraded Sri Lanka’s foreign currency sovereign credit rating to ‘CCC+/C’ from ‘SD/SD’ (Selective Default), reflecting improved macroeconomic stability, progress under the IMF programme, and the Government’s continued commitment to fiscal and debt management reforms.
The long-term foreign currency rating was raised from ‘SD’ to ‘CCC+’ with a stable outlook, signalling cautious optimism over Sri Lanka’s medium-term ability to meet its debt obligations. This marks the first ratings upgrade since Sri Lanka’s default on external debt in 2022.
According to S&P, Sri Lanka has made meaningful strides in stabilising the economy, completing four IMF reviews and unlocking US$ 1.7 billion in funding. While acknowledging delays in some targets, the agency noted the continuation of politically challenging reforms, including in taxation, energy pricing, and governance.
“Sri Lanka’s economy has recovered steadily from its 2022 economic crisis, with some macroeconomic indicators already surpassing pre-crisis levels. However, its debt burden remains high even after the restructuring of most of its external debt,” S&P said.
The upgrade also reflects Sri Lanka’s progress in completing the restructuring of its remaining commercial debt, including SriLankan Airlines bonds, following the December 2024 exchange of most Eurobonds. While recognising the risk of holdout creditors, S&P said it did not expect this to derail the restructuring process.
S&P highlighted key factors supporting the rating:
- Strong economic recovery and rapid fiscal consolidation.
- Reform momentum under the IMF programme.
- Accumulation of foreign reserves and improved external position.
- Efforts to reduce risks from state-owned enterprises (SOEs).
These positives are tempered by Sri Lanka’s heavy debt burden, particularly as domestic commercial debt was excluded from the restructuring. The country also faces an interest burden of about 50% of government revenue, with external debt servicing pressures expected to rise from 2029 onward.
The stable outlook reflects a balance between expectations of continued recovery and reform progress against the risks posed by high debt levels and fiscal vulnerabilities.
