Fitch Ratings has upgraded Sri Lanka's Long-Term Issuer Default Ratings (IDRs) to 'B-' from 'CCC+'. The Outlook is Stable.

The upgrade reflects the implementation of macro-stabilization policies, underpinned by structural reforms, which have eased external financing risks and provide a degree of resilience to shocks, the statement said. 

This is reflected by sharp improvements in fiscal and external balances, and a modest rebuilding of FX reserves. Fiscal discipline and revenue mobilization efforts should support sustained primary surpluses that keep government debt-to-GDP on a downward trend and reduce risks of a reemergence in external imbalances.

Fitch said Sri Lanka's credit profile remains hindered by still-high government debt-to-GDP and debt service ratios compared to rating peers, despite the recent restructuring and macroeconomic adjustment. FX reserve buffers remain modest, particularly considering a rise in external debt service over the next five years.

“We forecast a healthy primary surplus of 2.6% of GDP in 2026, albeit down from the record 5.4% surplus in 2025, buoyed by sustained revenue growth. This is consistent with the overall deficit rising to 4.1% of GDP in 2026 from 2.3% in 2025.” 

Fitch Ratings further said rising revenue reflects tax reforms and a temporary surge in import duties from pent-up demand for imported cars while revenues are offsetting higher expenditures for reconstruction after Cyclone Ditwah in 2025 and targeted energy support measures.

The statement further said: “We expect primary surpluses to remain above 2% of GDP over the next few years, supported by steady revenue and expenditure restraint. Although revenue will moderate with easing auto imports, revenue mobilization efforts should keep collections at just under 16% of GDP in the coming years. 

The 2024 Public Financial Management Act caps non-interest spending at 13% of GDP through 2031 which should maintain fiscal discipline, though the cap has been exceeded in 2026 for cyclone reconstruction. Even amid reforms, risks of slippage may rise as the 2029 elections draw near.”

It said government debt and interest/revenue ratios remain high relative to peers but are gradually improving. “We forecast debt to fall to 92.9% of GDP in 2026 (B median: 54.7%) from 96.7% in 2025 and continue declining in the next five years to the low-80% levels. We expect the interest/revenue ratio to ease to 41.0% in 2026 from 45.6% in 2025 and a 2023 peak of 76.3%.” 

This is still 3x above the 12.7% 'B' median. Fiscal space is limited and adherence to recently developed fiscal frameworks will help ensure continued sustainability.

“We expect high energy prices to flip the current account to a deficit of 1.2% of GDP in 2026 following three years of an average surplus of 1.5%. The US-Iran conflict has pushed up the energy import bill and temporarily dented tourism inflows. However, remittances continue to rise steadily, helping to offset these headwinds. Risks remain elevated given uncertainties in the US-Iran conflict and Sri Lanka's position as a large net energy and fertilizer importer. As the shock eases in 2027, we expect the current account to return to near balance.”