By: Staff Writer
September 23, Colombo (LNW): Sri Lanka’s economy has received a symbolic boost with all three major global ratings agencies lifting the country’s sovereign credit rating out of default. Yet, behind the headline upgrades lies a sobering reality: heavy debt, fragile revenues, and policy uncertainty under the year-old National People’s Power (NPP) government continue to cloud the outlook for sustainable recovery.
S&P Global Ratings last week raised Sri Lanka’s long- and short-term foreign currency ratings to ‘CCC+/C’ from ‘SD/SD’, citing progress in debt restructuring. Fitch Ratings had earlier upgraded the sovereign to ‘CCC+’ from ‘RD’ in December 2024, while Moody’s elevated its grade to Caa1 from Ca around the same time. Collectively, the moves mark the end of Sri Lanka’s technical default status following its 2022 financial collapse.
However, all three agencies stopped well short of optimism. S&P warned that Sri Lanka’s debt dynamics remain “exceptionally vulnerable” despite restructuring gains. Fitch flagged that interest costs, expected to absorb over half of government revenue in 2025, “leave little fiscal space for development spending.” Moody’s, while acknowledging the stabilisation of foreign reserves, cautioned that “weak governance and policy execution risks weigh heavily on investor confidence.”
The numbers underline these concerns. Net government debt is projected at 101% of GDP in 2025, falling only modestly to 93% by 2028. Interest payments will consume about 51% of government revenue this year, compared with a peer median of just 16%. Government revenue has climbed from a crisis-era low of 8.3% of GDP in 2021–22 to around 15% now, but the base remains narrow. Reserves have improved to $6.1 billion by August 2025, while GDP grew 4.9% in the second quarter Sri Lanka’s first solid growth after two years of contraction.
Yet this fragile recovery is being undermined by policy drift. In its first year in office, the NPP government has struggled to outline a clear strategy to lift growth, boost foreign inflows, or attract meaningful foreign direct investment (FDI). Investor sentiment remains cautious, with many international businesses citing regulatory uncertainty, slow reforms, and an absence of incentives as key deterrents. Exports have stagnated, remittance growth has plateaued, and new FDI commitments remain negligible.
Ratings agencies have all highlighted governance and policy execution as a central risk. “The sustainability of Sri Lanka’s recovery depends heavily on consistent adherence to IMF-backed fiscal and structural reforms,” Fitch noted. S&P went further, warning that political uncertainty could delay reforms “crucial to securing long-term financing and investor participation.”
The IMF’s Extended Fund Facility has provided a lifeline, helping rebuild reserves and stabilise the rupee, but implementation gaps threaten momentum. Without a coherent industrial and trade policy, Sri Lanka risks being locked into low growth, high-debt equilibrium. Analysts stress that the government’s focus should shift quickly toward expanding export capacity, attracting sustainable FDI in technology and services, and improving governance to restore credibility.
For now, Sri Lanka’s exit from default is a step forward, but the upgrades remain firmly in speculative territory—a reminder that the country’s path back to creditworthiness will be long and uncertain. Unless the NPP government can deliver tangible reforms that raise GDP, diversify foreign inflows, and build investor confidence, the recovery risks stalling before it gathers pace.
