Fitch upgrades Sri Lanka’s credit rating to ‘B-‘ with stable outlook

Fitch Ratings has upgraded Sri Lanka’s Long-Term Issuer Default Ratings (IDRs) to ‘B-’ from ‘CCC+’, with a Stable Outlook, citing stronger fiscal and external balances, structural reforms and reduced external financing risks.

In its rating action announced today (September 22, 2026), Fitch said Sri Lanka’s macroeconomic stabilization policies and structural reforms have helped the country become more resilient to economic shocks. The agency also pointed to a modest rebuilding of foreign exchange reserves.

Fitch said continued fiscal discipline and efforts to increase government revenue are expected to maintain primary budget surpluses, helping reduce government debt as a share of GDP and lower the risk of renewed external imbalances.

However, Sri Lanka’s credit profile remains constrained by high government debt and debt-servicing costs compared with countries with similar ratings. Fitch also said foreign exchange reserves remain relatively modest, particularly as external debt repayments are expected to increase over the next five years.

Fitch expects Sri Lanka to record a primary surplus of 2.6% of GDP in 2026, down from the record 5.4% achieved in 2025. The overall budget deficit is forecast to rise to 4.1% of GDP this year from 2.3% in 2025.

The increase in government revenue has been supported by tax reforms and a temporary rise in import duties due to strong demand for imported vehicles. Fitch said these revenues are helping offset higher spending on reconstruction following Cyclone Ditwah in 2025 and targeted energy support measures.

Primary surpluses are expected to remain above 2% of GDP over the next few years, supported by steady revenue and controls on government expenditure.

Although revenue from vehicle imports is expected to moderate, Fitch expects government revenue collections to remain just below 16% of GDP in the coming years.

The Public Financial Management Act of 2024 limits non-interest government spending to 13% of GDP through 2031. Fitch said this should help maintain fiscal discipline, although the limit has been exceeded in 2026 due to cyclone reconstruction spending. The agency also said risks of fiscal slippage could increase as the 2029 elections approach.

Government debt is forecast to decline to 92.9% of GDP in 2026 from 96.7% in 2025 and fall further to the low-80% range over the next five years. However, this remains well above the 54.7% median for countries rated in the ‘B’ category.

Fitch expects Sri Lanka’s interest payments as a share of government revenue to decline to 41.0% in 2026 from 45.6% in 2025 and a peak of 76.3% in 2023. The projected 2026 level is still more than three times the 12.7% median among ‘B’-rated countries.

Fitch said Sri Lanka continues to have limited fiscal space and that compliance with the country’s recently introduced fiscal frameworks will be important to maintaining debt sustainability.

Meanwhile, higher global energy prices are expected to push Sri Lanka’s current account into a deficit equal to 1.2% of GDP in 2026, following three years in which the country recorded an average current account surplus of 1.5% of GDP.

According to Fitch, the US-Iran conflict has increased Sri Lanka’s energy import costs and temporarily affected tourism inflows. However, steadily rising workers’ remittances are helping to offset some of these pressures.

Fitch said risks remain high because of uncertainty surrounding the US-Iran conflict and Sri Lanka’s dependence on imported energy and fertilizer. The agency expects the current account to return to close to balance in 2027 as the energy shock eases.

Financing from the International Monetary Fund (IMF) and other multilateral institutions continues to provide external funding and help Sri Lanka manage near-term current account pressures.

Together with greater exchange-rate flexibility, this support is expected to help Sri Lanka increase its foreign exchange reserves to USD 7.7 billion by the end of 2026, equivalent to around 2.9 months of current external payments.

However, Fitch said recent external pressures have slowed the pace of reserve accumulation, with risks remaining on the downside.

Sri Lanka’s external debt repayments are also expected to increase over the next five years, particularly after 2028. Fitch said this would leave the country vulnerable to external shocks or any weakening of economic policies.

The agency expects the highest threshold under Sri Lanka’s macro-linked bonds to be reached, resulting in higher interest and principal payments.

Fitch also noted that the Government is considering returning to international bond markets in 2027.

Sri Lanka’s current IMF Extended Fund Facility programme is due to end in March 2027. Fitch said a follow-on IMF programme is possible and could help maintain the country’s policy framework while providing additional financial support if needed.

Fitch said Sri Lanka’s economy has remained resilient despite the effects of Cyclone Ditwah and the US-Iran conflict.

However, economic growth is expected to slow to 4.1% in 2026 from an average of 5.0% during the previous two years. Fitch sees risks to this forecast mainly on the downside because of Sri Lanka’s vulnerability to energy-related shocks.

The agency expects medium-term economic growth of slightly above 4%.

Fitch said Sri Lanka continues to face difficulties in attracting foreign direct investment, strengthening its export sector and revitalizing state-owned enterprises. However, continued reforms could improve the country’s growth prospects.

Headline inflation is forecast to average 6.3% in 2026, up from negative 0.5% in 2025, as higher global energy prices and El Niño conditions increase domestic price pressures.

The Central Bank of Sri Lanka raised its policy interest rate by 100 basis points to 8.75% in May, 2026 to address inflation risks and support the exchange rate.

Fitch said it does not expect further interest rate increases. It expects current price pressures to be temporary, with inflation falling to just below the Central Bank’s 5% target next year.

On governance, Fitch said Sri Lanka has a medium ranking under the World Bank Governance Indicators, at the 39.6th percentile.

The agency said this reflects Sri Lanka’s recent record of peaceful political transitions, a moderate level of participation rights in the political process, moderate institutional capacity, an established rule of law and a moderate level of corruption.