Sri Lanka’s latest sovereign rating review by Moody’s Ratings paints a picture of cautious optimism, one of gradual recovery tempered by deep-seated fiscal weaknesses and persistent debt pressures.
While acknowledging the nation’s improving macroeconomic fundamentals, the agency reaffirmed the country’s Caa1 rating with a stable outlook, underscoring that structural fragility and high external dependency still weigh heavily on its credit profile.
Moody’s said Sri Lanka’s economic recovery “remains broadly on track,” supported by fiscal reforms, a rebound in tourism, and robust remittance inflows.
However, it cautioned that the nation’s heavy debt burden, limited fiscal flexibility, and dependence on foreign financing pose continued risks to stability. “Debt affordability remains weak, even as liquidity pressures have eased since the 2022 default,” the report noted.
According to Moody’s, real GDP expanded by 4.8% year-on-year in the first half of 2025, following a 5% rise in 2024. The agency expects growth to moderate to around 4.5% by year-end as base effects fade. Recovery in tourism to near pre-pandemic levels and stronger investment activity are expected to drive medium-term growth, supported by higher social spending that could lift consumer confidence.
On the fiscal side, Moody’s projects a deficit of 6–6.5% of GDP in 2025, narrowing from 6.8% last year. Revenues grew 26.5% year-on-year during the first seven months of 2025, aided by the lifting of vehicle import restrictions and stronger tax receipts. The primary balance is expected to remain in surplus, marking slow but steady debt reduction.
However, the agency warned that Sri Lanka’s narrow tax base and continued reliance on external funding remain key vulnerabilities. “Sustained reform momentum under the IMF programme could strengthen Sri Lanka’s credit profile, but any policy reversal or weakening in external buffers would increase downside risks,” it cautioned.
Moody’s also highlighted that while liquidity risks have eased following the 2022 debt restructuring and a buildup in foreign reserves, external vulnerabilities persist. The government’s ability to manage debt service obligations depends heavily on continued multilateral and bilateral support.
The agency’s stable outlook reflects a balance of risks optimism over reform progress offset by the fragility of Sri Lanka’s fiscal position. Moody’s said that upward pressure on ratings could emerge if reforms broaden the revenue base, improve debt affordability, and enhance institutional credibility. Conversely, any slowdown in fiscal reform, external shocks, or erosion of foreign exchange reserves could trigger renewed instability.
The reaffirmation of Sri Lanka’s low credit rating serves as a reminder that, despite signs of economic normalization, the country remains vulnerable to policy slippage and external shocks. Sustained commitment to reforms and prudent debt management will be key to securing a durable recovery and regaining investor confidence.
