S&P says Sri Lanka’s Economy showing resilience, keeps rating stable

Colombo, July 28 (Daily Mirror) - S&P Global Ratings has affirmed Sri Lanka’s long- and short-term sovereign credit ratings at ‘CCC+/C’, while maintaining a stable outlook, citing continued economic recovery, strong revenue growth and improvements in fiscal management.

The ratings agency said Sri Lanka’s economy has remained resilient despite multiple external challenges, with increased government revenue helping to support fiscal consolidation and reduce debt servicing pressures.

However, S&P warned that the country’s external position could come under pressure this year due to a higher import bill and possible impacts from the Middle East conflict on tourism earnings and worker remittances.

The stable outlook reflects S&P’s expectation that Sri Lanka’s economic growth and fiscal recovery will continue over the next six to 12 months, although external risks remain significant.

“Sri Lanka’s creditworthiness remains vulnerable and dependent on favourable financial and economic conditions, but the government does not face an immediate risk of a debt or payment crisis,” the agency said.

S&P noted that Sri Lanka’s economic recovery has been stronger than expected, with real GDP growing 4.8% in the fourth quarter of 2025 and 5.1% in the first quarter of 2026.

The agency expects economic growth to slow to 3.8% in 2026 due to higher energy costs and external pressures before recovering to 4.2% in 2027 as global energy conditions improve.

S&P highlighted that government revenue increased significantly, supported by tax reforms and economic recovery. Revenue rose by 34% in 2025 to 16.7% of GDP, while the fiscal deficit narrowed to 2.3% of GDP.

Revenue growth continued in the first five months of 2026, increasing by 30% compared to the same period last year, the agency said.

However, S&P cautioned that Sri Lanka’s external position has weakened due to rising imports, currency pressures and uncertainty over tourism and remittance inflows.

The ratings agency said the Middle East conflict could affect Sri Lanka through higher energy prices, reduced tourism earnings and slower remittance growth, as the region accounts for a significant share of foreign worker remittances.

It also warned that a stronger El Niño event in 2026 and 2027 could pose risks to agriculture, electricity generation and overall economic activity.

S&P said Sri Lanka’s continued commitment to reforms under the International Monetary Fund (IMF) programme, including improving government revenue, cost recovery in utilities and strengthening public financial management, would remain important for further economic improvement.

The agency said it could upgrade Sri Lanka’s ratings if stronger economic growth leads to further improvements in fiscal and external positions. However, the ratings could be downgraded if renewed funding pressures or a significant deterioration in economic conditions emerge.