Sri Lanka Foreign Currency Ratings Raised To 'CCC+/C' From 'SD'; Outlook Stable

COLOMBO(News 1st); Global rating agency S&P Global Ratings has raised Sri Lanka’s long- and short-term foreign currency sovereign credit ratings to ‘CCC+/C’ from ‘SD/SD’ (selective default), reflecting the country’s steady economic recovery and ongoing fiscal reforms. The outlook on both foreign and local currency ratings remains stable, signaling confidence in Sri Lanka’s ability to manage its debt despite persistent structural vulnerabilities.

The upgrade comes as Sri Lanka continues negotiations with creditors on remaining commercial debt, including government-guaranteed bonds of SriLankan Airlines, although the agency notes that further resolution appears unlikely in the near term. Most external debt has already been restructured following the December 2024 Eurobond exchange, yet some holdout creditors may remain.

S&P highlighted Sri Lanka’s strong economic recovery, accumulation of foreign exchange reserves, and fiscal consolidation under the ongoing IMF program. These strengths, it said, are counterbalanced by the country’s high debt levels and heavy interest burden, with interest payments expected to reach about 51% of government revenue in 2025.

Economic Recovery and Outlook
Sri Lanka’s economy has recovered steadily from the 2022 crisis, with key macroeconomic indicators surpassing pre-crisis levels. Real GDP growth in the second quarter of 2025 reached 4.9%, with overall growth projected at 4.2% for the year. Strong performance across agriculture, textiles, garments, and tourism has supported this rebound, though growth is expected to slow in the second half of 2025 due to external uncertainties.

Political stability has played a key role in economic recovery. The ruling National People's Power (NPP) party, with its supermajority in parliament and control over most local councils, has improved policy predictability and strengthened reform momentum. S&P notes the government’s commitment to fiscal and structural reforms under the IMF program, including revenue-based budget repair, cost-recovery pricing for utilities, and debt management improvements. Four IMF program reviews have been completed, unlocking approximately US$1.74 billion in funding.

Fiscal Performance and Debt Profile
The lifting of vehicle import restrictions has driven a surge in customs revenue, contributing to a 26.5% increase in total revenue in the first seven months of 2025 compared to 2024. Government revenue is projected to reach 15% of GDP, allowing for a primary surplus and a narrowing overall deficit, expected to decline to 5.4% in 2025 and 4.5% by 2028.

Despite these gains, Sri Lanka’s debt remains high. Net general government debt, including state-owned enterprise guarantees, is projected at 101% of GDP in 2025, gradually declining to 93.4% by 2028. Most domestic commercial debt was excluded from the debt restructuring process, and interest payments will remain a substantial fiscal burden.

External Position and Monetary Policy
Sri Lanka’s external position has improved with strong remittance inflows, rebounding tourism earnings, and recovery in goods exports. The current account has returned to surplus since 2023, and foreign exchange reserves have been rebuilt. Gross external financing needs as a share of current account receipts and usable reserves are projected to average 107% from 2025-2028, compared with pre-crisis levels exceeding 120%.

Inflation has remained muted, giving the Central Bank flexibility to manage policy rates and gradually replace high-yield debt with cheaper borrowing. While monetary policy credibility remains a structural concern, the passage of the Central Bank Act in 2023 has strengthened institutional autonomy.

S&P Assessment
The rating agency noted that Sri Lanka’s CCC+ rating reflects its vulnerability to economic and financial shocks, though the country is not facing a near-term payment crisis. The stable outlook balances expectations of continued economic recovery and fiscal improvements against the country’s high debt and heavy interest burden.

S&P also highlighted the potential for future rating changes: a downgrade could occur if inflation rises sharply, fiscal performance weakens, or funding stresses emerge. Conversely, stronger economic growth and deeper entrenchment of fiscal reforms could lead to a future upgrade.