Moody’s Ratings has affirmed Sri Lanka’s Caa1 foreign currency long-term issuer and senior unsecured ratings, while maintaining a stable outlook, citing continued weaknesses in debt affordability and a high government debt burden despite progress in restoring macroeconomic stability following the 2022 economic crisis.

Moody’s said fiscal reforms implemented under Sri Lanka’s International Monetary Fund (IMF) program have improved government revenue collection and helped sustain primary budget surpluses.

However, the ratings agency noted that high interest costs continue to place significant pressure on government finances, absorbing more than 40% of government revenue.

Government debt is projected to reach around 95% of GDP in 2026, equivalent to more than 580% of government revenue, according to Moody’s.

External Vulnerabilities Remain High

Moody’s also highlighted Sri Lanka’s continued exposure to external financing risks.

Sri Lanka’s import cover remains below three months, while its external vulnerability indicator ratio is expected to remain above 250%, reflecting elevated external financing pressures, according to Moody’s.

The ratings agency said Sri Lanka remains vulnerable to external shocks, including developments arising from the Middle East conflict, particularly through their potential impact on energy prices, tourism earnings and the balance of payments.

Sri Lanka’s exposure to severe weather events and other physical climate risks also remains a significant credit challenge, Moody’s said.

Growth Outlook Remains Uncertain

Although Sri Lanka’s economy has recorded a strong recovery in the near term, Moody’s said longer-term growth prospects remain uncertain.

Social vulnerabilities, the continued emigration of skilled workers and weak private-sector investment are among the factors weighing on the country’s productive capacity.

Moody’s expects medium-term economic growth to remain moderate, with potential growth estimated at around 4%.

IMF Program to Test Reform Commitment

Sri Lanka’s current IMF program is scheduled to conclude in 2027.

Moody’s said the end of the program will remove an important policy anchor as well as a key source of concessional external financing.

The period after the IMF program ends will therefore be critical for Sri Lanka, particularly as external debt-service obligations are expected to gradually increase from 2028.

The ratings agency said the country’s ability to maintain its reform momentum after the IMF program expires will be an important factor in assessing the durability of its economic recovery and debt sustainability.

The stable outlook reflects Moody’s assessment that the risks surrounding Sri Lanka’s current Caa1 rating are broadly balanced.