Sri Lanka’s ongoing economic upswing in the road to recovery from default was substantiated further last week, with S&P’s notch upgrade to Sri Lanka’s foreign currency rating to CCC+/C. The ratings agency pointed to Sri Lanka’s sustained momentum in economic recovery, running parallel to twin surpluses.
S&P notes that Sri Lanka’s fiscal position has witnessed continued strength, with revenues boosted by vehicle import relaxation and new tax measures under the IMF program, helping narrow the primary deficit steadily despite political sensitivities. The external current account remains positive, supported by strong remittances, tourism surpassing pre-pandemic levels, export resilience amid lower-than-expected U.S. tariffs, and multilateral inflows alongside a stable rupee that have rebuilt reserves and eased financing pressures. Growth prospects are cautiously optimistic, with real GDP expected to expand 4.2% in the second half of 2025 before moderating as tariff risks weigh on exports, while underperforming capital expenditure, is expected to persist and dampen medium-term GDP growth.
S&P’s stable outlook signals cautious optimism over Sri Lanka’s recovery, though risks remain from a heavy legacy debt stock, with central government debt projected at about 101% of GDP in 2025 before easing to 93.4% by 2028, while interest payments are set to absorb around half of revenues over the same period. Sustaining an upside scenario in this high debt–high interest environment hinges on hardcoding fiscal and monetary reforms to preserve steady surpluses.
The update also delves into what the credit rating upgrade means for Sri Lanka’s road ahead, and how Sri Lanka stands to benefit from better creditworthiness reflected.
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