Fitch says Sri Lanka’s 2026 Budget shows commitment to debt reduction

Sri Lanka’s latest budget reflects the government’s strong focus on cutting debt levels in the coming years, according to Fitch Ratings.

The agency noted that maintaining steady revenue growth will be crucial for meeting the country’s fiscal targets.

The 2026 Budget, presented on November 7, 2025, sets a budget deficit target of 5.1% of GDP, slightly higher than the 4.5% expected for 2025, but still a major improvement compared to past estimates. Last year’s budget had forecast a 6.7% deficit for 2025, which the IMF later revised down to 5.4% in March.

The government expects the primary surplus, the balance before interest payments, to remain positive at 2.5% of GDP in 2026, compared to 3.8% in 2025, exceeding the 2.3% target under the IMF programme. It also aims to bring the overall deficit down further to 3.8% of GDP by 2030.

Fitch said that continued progress under the IMF-supported programme would help strengthen Sri Lanka’s policy credibility and keep the economy stable. Although the 2026 deficit forecast (5.1%) is slightly higher than Fitch’s earlier estimate of 4.6%, the agency said the country’s better-than-expected fiscal results in 2025 could help balance the impact.

According to the budget, government revenue is projected to dip slightly to 15.4% of GDP in 2026 from 15.9% in 2025, though this remains above Fitch’s forecast of 15.3%. The agency warned that if tax revenue growth slows compared to GDP, it could put pressure on the country’s credit profile.

Tax revenue from external trade is expected to drop by 1.2% in 2026, following a temporary rise in vehicle imports this year. On the other hand, goods and services tax income is forecast to rise by 3.5%, and income tax collections by 8%. Fitch described the goods and services tax target as “conservative,” since nominal GDP is expected to grow by over 7%, supported by new VAT registration thresholds and improved tax audits.

The agency also noted that the strong fiscal outcome in 2025 was partly due to lower-than-planned public spending, with investment at 3.2% of GDP, compared to the 4% target. Fitch warned that such underinvestment could limit future growth and make fiscal consolidation harder.

To encourage growth, the 2026 Budget introduces several development-focused measures, including:

• Expansion of Colombo International Airport
• LKR 342 billion (about 1% of 2026 GDP) for road development
• Tax incentives to promote digital infrastructure
• New legislation to support public-private partnerships (PPPs) in major projects

Despite these positive steps, Fitch cautioned that Sri Lanka’s high debt levels remain a concern. The agency expects gross government debt to fall from 100.5% of GDP in 2024 to around 96% in 2027, still much higher than the 74% median among countries rated ‘CCC’.

Fitch further warned that debt risks could increase after 2027, once the IMF programme ends and repayment obligations rise.

The agency said continued fiscal discipline and strong revenue performance will be essential to maintain stability and sustain the debt reduction path.