September 22, Colombo (LNW): Fitch Ratings has raised Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-’ from ‘CCC+’, marking a further improvement in the country’s sovereign credit standing. The ratings agency has assigned a Stable Outlook to the new rating.
Fitch said the upgrade reflects progress in Sri Lanka’s macroeconomic stabilisation programme and structural reforms, which have reduced external financing risks and improved the country’s ability to withstand economic shocks. The agency pointed in particular to significant improvements in fiscal and external balances, alongside a gradual rebuilding of foreign exchange reserves.
According to Fitch’s latest assessment, continued fiscal discipline and efforts to increase government revenue are expected to support primary budget surpluses and place public debt on a declining path. The agency forecasts a primary surplus equivalent to 2.6% of GDP in 2026, although this would be lower than the record 5.4% recorded in 2025.
Government debt is projected to fall from 96.7% of GDP in 2025 to 92.9% in 2026, with Fitch expecting the ratio to continue declining over the next five years towards the low-80% range.
The ratings agency, however, said Sri Lanka continues to face significant fiscal constraints. Government debt and debt-servicing costs remain high compared with countries carrying similar ratings, while foreign exchange reserves are still relatively modest in relation to the country’s future external debt-servicing requirements.
Fitch expects Sri Lanka’s interest-to-revenue ratio to decline to 41% in 2026, from 45.6% in 2025 and a peak of 76.3% in 2023. Despite the improvement, the ratio remains substantially above the median for countries in the ‘B’ rating category.
The agency also expects the country’s current account to move into a deficit of 1.2% of GDP this year, following three consecutive years of surpluses averaging 1.5%. Fitch attributed the anticipated deterioration partly to higher energy prices, which have increased the import bill, as well as a temporary impact on tourism earnings.
Rising remittances are expected to provide some support to the external position, while Fitch anticipates the current account will return close to balance in 2027 as the energy-related shock subsides.
External financing conditions are considered adequate in the near term, with continued support from the International Monetary Fund and other multilateral institutions helping Sri Lanka manage external financing requirements. Fitch forecasts foreign exchange reserves to reach US$7.7 billion, equivalent to around 2.9 months of current external payments, by the end of 2026.
Nevertheless, the agency cautioned that Sri Lanka’s external buffers remain limited. Debt repayments are expected to increase over the next five years, particularly from 2028 onwards, leaving the country exposed to potential external shocks or any weakening of fiscal and economic policies.
Fitch noted that the Government is considering a return to international sovereign bond markets in 2027. Sri Lanka’s current IMF Extended Fund Facility programme is due to conclude in March 2027, while a subsequent IMF arrangement could potentially provide additional policy support and a financing backstop.
On economic growth, Fitch expects the Sri Lankan economy to expand by 4.1% in 2026, compared with average growth of 5% over the previous two years. The agency said the economy had demonstrated resilience despite the impact of Cyclone Ditwah and the US-Iran conflict, although it identified energy vulnerabilities as a continuing downside risk.
Medium-term growth is projected at slightly above 4%. Fitch also highlighted longer-term challenges, including attracting foreign direct investment, expanding exports and improving the performance of state-owned enterprises.
Inflation is expected to average 6.3% in 2026, a marked increase from the negative 0.5% recorded in 2025. Fitch attributed the expected rise to global energy pressures and El Niño-related effects. It said inflation should subsequently ease to just below the Central Bank of Sri Lanka’s 5% target next year.
The agency said Sri Lanka’s credit rating could come under upward pressure if there is a substantial reduction in the government debt-to-GDP and interest-to-revenue ratios, supported by credible fiscal consolidation, improved debt management, stronger revenue mobilisation and faster economic growth. A large and sustained increase in foreign exchange reserves, including through stronger remittances or export performance, could also support an upgrade.
Conversely, Fitch identified weaker fiscal discipline or a slowdown in revenue mobilisation as potential factors that could lead to a downgrade. Renewed external liquidity pressures, an inability to build foreign exchange reserves or the return of persistent and sizeable current account deficits in line with its Long-Term Foreign-Currency IDR, while senior unsecured could also negatively affect the rating.
Fitch has also maintained Sri Lanka’s Country Ceiling at ‘B-’, in line with its Long-Term Foreign-Currency IDR, while senior unsecured long-term debt ratings have been aligned with the applicable Long-Term IDR.
The latest assessment represents another step in the gradual rebuilding of Sri Lanka’s sovereign credit profile following the country’s recent economic and debt restructuring process.