Fitch upgrades Sri Lanka to B- with a stable outlook

On 22 September 2026, Fitch Ratings upgraded Sri Lanka’s Long-Term Issuer Default Ratings to B- from CCC+ and assigned a Stable outlook. The move is one of the clearer external signals that, in the rating agency’s view, the post-crisis stabilisation programme has taken hold — while still leaving Sri Lanka in speculative-grade territory, with a credit profile constrained by high public debt.

Why the upgrade happened

Fitch attributed the decision to the implementation of macro-stabilisation policies, underpinned by structural reforms, which it said have eased external financing risks and provide a degree of resilience to shocks. That assessment rests on improved fiscal and external balances and a modest rebuilding of foreign-exchange reserves. The agency expects fiscal discipline and revenue mobilisation to support sustained primary surpluses, keep government debt-to-GDP on a downward path, and reduce the risk of external imbalances re-emerging.

At the same time, Fitch was explicit that Sri Lanka’s credit profile is still hindered by high government debt-to-GDP and debt-service ratios compared with rating peers, even after the recent restructuring and macroeconomic adjustment. Reserve buffers remain modest relative to the rise in external debt service expected over the next five years.

The fiscal path, as Fitch sees it

Fitch forecasts a primary surplus of 2.6% of GDP in 2026, down from a record 5.4% in 2025, with the overall deficit rising to 4.1% of GDP from 2.3%. Revenue is being lifted by tax reforms and a temporary surge in import duties linked to pent-up demand for imported cars, which is helping to offset higher spending on reconstruction after Cyclone Ditwah and targeted energy support.

The agency expects primary surpluses to remain above 2% of GDP over the next few years, with revenue collections staying just under 16% of GDP. It notes that the 2024 Public Financial Management Act caps non-interest spending at 13% of GDP through 2031, although that cap has been exceeded in 2026 for cyclone reconstruction.

Government debt is forecast to fall to 92.9% of GDP in 2026 from 96.7% in 2025, and to continue declining over five years towards the low-80% range. That would still be well above the ‘B’ category median of 54.7% cited by Fitch. The interest-to-revenue ratio is expected to ease to 41.0% in 2026 from 45.6% in 2025 and a 2023 peak of 76.3% — still about three times the 12.7% ‘B’ median.

External accounts and reserves

Higher energy prices, linked by Fitch to the US–Iran conflict, are expected to flip the current account to a deficit of 1.2% of GDP in 2026, after three years of an average surplus of 1.5%. The same shock is described as having temporarily dented tourism inflows. Remittances, however, are still rising and help to offset those headwinds.

Financing from the IMF and other multilateral agencies is expected to mitigate near-term current-account pressures. Together with exchange-rate flexibility, that support is expected to allow reserves to reach USD 7.7 billion by end-2026, equivalent to 2.9 months of current external payments. Fitch cautions that the external shock has already dampened the pace of reserve accumulation, and that external repayments are set to rise over the next five years, particularly after 2028. It also expects the highest threshold on Sri Lanka’s macro-linked bonds to be reached, triggering higher interest and principal payouts. The government is considering a return to global bond markets in 2027. The current IMF Extended Fund Facility programme ends in March 2027; Fitch notes that a follow-on facility is possible.

Growth, inflation and policy rates

Fitch describes the economy as resilient to the cyclone and the energy shock, but expects growth to moderate to 4.1% in 2026, with medium-term growth a little above 4%. Headline inflation is forecast to average 6.3% in 2026, after deflation of 0.5% in 2025, as the global energy shock and El Niño add to domestic price pressures. The Central Bank of Sri Lanka raised its policy rate by 100 basis points in May to 8.75%. Fitch does not expect further hikes, and sees inflation receding to just below the Central Bank’s 5% target the following year.

What it means for Israeli investors

A move from CCC+ to B- does not, by itself, make Sri Lanka a low-risk market. It does indicate that an independent rating agency now sees the stabilisation effort as more durable, which can gradually improve financing conditions, currency confidence and the backdrop for longer-term commitments in real estate, tourism, manufacturing and services. The same report, however, underlines that debt remains high, reserve cover is still thin, and energy-price shocks can quickly reopen the current-account deficit. Any investment case should be built on project-level due diligence, not on the headline rating alone.

Talk to us

If you would like to discuss how Sri Lanka’s credit recovery affects a planned investment, contact Kenglobe Lanka. Write to sh@kenigs.com or message us on WhatsApp.

This page is general information, not credit, investment or legal advice. Rating opinions can change.