Fitch warns debt risks loom after 2027 for SL despite fiscal gains

• Projects average primary surpluses of 2.7 percent of GDP between 2025 and 2027
• Says additional revenue-enhancing measures still in the pipeline provide upside to its projections
• Reiterates debt remains “elevated” even after the sovereign’s restructuring in 2024
• Cautions repayments under the new macro-linked bonds will begin to climb from 2028

Sri Lanka’s revenues jumped 27 percent in the first seven months of 2025, pushing the island nation into a primary surplus and helping foreign reserves recover to US$ 6.2 billion. However, Fitch Ratings warned that debt and interest burdens will remain far above peer levels despite reforms.

The rating agency projects average primary surpluses of 2.7 percent of GDP between 2025 and 2027, after a sharp turnaround from a deficit of 5.7 percent in 2021 to a surplus of 2.2 percent in 2024. 

The 2025 budget targets an overall deficit of 6.7 percent of GDP, but Fitch expects a narrower 5.4 percent gap due to lower interest costs and spending under-execution. By 2027, the deficit is forecast to shrink further to 4.2 percent. Revenues-to-GDP are expected to stabilise at about 15.3 percent over 2026–2027, below the ‘CCC’ median of 22.5 percent. Tax revenue, which accounts for nearly 93 percent of state income, climbed 28 percent year-on-year in the January–July period. Fitch said additional revenue-enhancing measures still in the pipeline provide upside to its projections.

Despite these fiscal gains, Fitch said debt remains “elevated” even after the sovereign’s restructuring in 2024. Gross government debt is projected at 96 percent of GDP in 2027, compared with the 74 percent median for ‘CCC’-rated peers. The interest-to-revenue ratio, though easing, is still seen at 46.5 percent in 2027 versus a 14.3 percent median.

The agency warned that repayments under the new Macro-Linked Bonds will begin to climb from 2028, raising principal and coupon payments. 

“We expect this to be accommodated with debt declining if primary surpluses are maintained and GDP growth is sustained at 3.5 percent,” Fitch said, while cautioning that risks to the debt outlook remain high beyond 2027.

Sri Lanka’s reserves, which had collapsed to US$ 1.9 billion in 2022 at the height of its crisis, have recovered steadily, supported by debt relief, stronger remittances, and foreign exchange purchases by the Central Bank. Reserves stood at US$ 6.2 billion in July - August 2025 and are projected to rise to US$ 6.4 billion by year-end, providing coverage of 2.8 months of imports.

The external liquidity ratio improved to 96.5 percent at end-2024 from 55.1 percent in 2022. Fitch expects the current account surplus to continue this year, after a US$ 1.2 billion surplus in 2024 (1.2 percent of GDP). Worker remittances rose 19 percent year-on-year in January - August 2025, while tourism and other services receipts helped offset a modest trade deficit.

The agency highlighted “substantial progress” under Sri Lanka’s US$ 2.9 billion IMF programme, including the passage of the 2025 budget in line with programme targets, restoration of cost-reflective electricity tariffs, and greater tax compliance. Reforms to the Ceylon Electricity Board and other state-owned enterprises remain on the agenda, with foreign direct investment flagged as critical for sustaining medium-term growth.

The agency acknowledged monetary policy discipline has also been maintained, with the Central Bank of Sri Lanka refraining from deficit financing and exchange-rate flexibility preserved. Debt-management functions are being transferred from the Central Bank to a newly created Public Debt Management Office, which is expected to be fully operational by January 2026.

The economy grew 5 percent in 2024 and 4.8 percent in the first half of 2025, driven by a 7.9 percent expansion in industry and 3.3 percent growth in services. Fitch forecasts 4.4 percent growth this year, slowing to 3.8 percent in 2026 and 3.6 percent in 2027 as the recovery matures.

Inflation remains subdued but is projected to rise gradually to 5 percent by 2027, in line with Central Bank’s target. Fitch said U.S. tariffs pose a headwind, though the revised reciprocal rate of 20 percent that now aligns with peers, reducing risks to exports.

Governance weaknesses remain a structural constraint. Sri Lanka ranks in the 38th percentile of the World Bank Governance Indicators, and Fitch assigned ESG relevance scores of ‘5’ for political stability, rule of law, institutional quality, and corruption control. Scores of ‘4’ were given for human rights and creditor rights, reflecting the legacy of the 2022 default.