Standard Chartered Bank Economist Saurav Anand said Sri Lanka’s improving fiscal and debt indicators, recovery in consumption and the potential for an investment rebound, could support a change in the sovereign ratings outlook this year, even if the headline rating remains unchanged.
‘Our view is that we will see a change in the rating outlook this year,’ Anand said, adding that the most likely shift would be from Stable to Positive.
S and P Global and Fitch have upgraded Sri Lanka’s sovereign ratings to CCC+ with a Stable Outlook, citing the post-crisis recovery but continuing to highlight elevated debt levels and reliance on ongoing reforms, while Moody’s retains a lower Caa1 rating with a Stable Outlook.
He said Sri Lanka’s public debt position had strengthened materially since the start of the IMF program. ‘Debt-to-GDP has come down from around 125%-126% of GDP in 2022 to closer to 103%-104% by 2025 once the final numbers are out,’ Anand said. ‘We are expecting that number to fall below 100% by 2027.’
Anand noted that the IMF had initially projected Sri Lanka’s debt ratio to decline to 95% of GDP only by 2032, with earlier estimates pointing to 100% by 2030. ‘The IMF has since upgraded its forecast and now expects 100% of GDP by end 2028,’ he said, adding that Standard Chartered expected Sri Lanka to outperform that timeline.
He said fiscal consolidation had been central to the improving credit outlook. ‘The fiscal deficit target last year was around 4.5%, but based on actual data for the first 11 months, the deficit was only about 1% of GDP,’ Anand said, noting that the Government had indicated it would remain on the consolidation path in 2026 despite recent shocks.
Lower interest costs were also improving debt affordability. ‘Between 2022 and 2023, around 80% of Government revenue was going toward debt servicing,’ he said. ‘That ratio came down to around 50% in 2025, and we expect it to fall below 45% in 2026 and closer to 40% in 2027.’
Anand said Sri Lanka’s external debt servicing requirements were expected to ease, declining from $ 3.5 billion in 2025 to under $ 3 billion in 2026, while official reserves were projected to rise to about $ 7.5 billion by end-2026.
On growth dynamics, Anand said consumption had strengthened over the past year. ‘Consumption looks good,’ he said, adding that domestic demand was supporting a broadly robust outlook.
Investment, however, remained well below pre-crisis levels. ‘Investment levels in 2025 are still only around 60% of the 2018 level,’ Anand said, referring to the prolonged investment slowdown between 2019 and 2023-24.
He said a recovery in Government capital expenditure would be important in lifting investment momentum. ‘With Government capex coming back, investment growth is likely to be supported,’ Anand said.
Taken together, he said stronger consumption and a gradual investment recovery supported growth of around 3.5% to 4% in 2026, unless there was a larger-than-expected impact from Cyclone Ditwah.
Standard Chartered sees both upside and downside risks to its growth outlook. Upside risks include higher Government capital expenditure, which could crowd in private investment, and sustained implementation of structural reforms that improve confidence and attract equity capital inflows.
Downside risks include large-scale infrastructure damage from Cyclone Ditwah, still-limited fiscal space, constrained external financing support and uncertainty around global trade and monetary policy.
The bank expects the current account to remain in surplus in 2026, though narrowing to around 1% of GDP as consumption- and investment-related imports pick up, partly offset by lower vehicle imports.
Remittances are expected to remain strong, although growth may moderate from around 20% in 2025, while tourism is projected to expand by 5%-10% in 2026.
Standard Chartered estimates the 2025 current account surplus at 1.8% of GDP, driven by services exports and remittances, even as the merchandise trade deficit widens.
On monetary policy, the Central Bank of Sri Lanka is expected to maintain the policy status quo in 2026, with policy rates likely to remain on hold amid robust economic activity and easing inflation pressures. The bank has revised its 2026 inflation forecast down to 4.5% from 5.0%, while maintaining its 2025 forecast at 0.7%.
Private-sector credit growth remains elevated at 22.1% as of September, supported by accommodative policy and improved liquidity. This has driven a sharp fall in interest rates, with average weighted new lending and deposit rates declining to 10.3% and 5.9%, respectively, in September, from 25.8% and 22.2% in January 2023. The central bank is expected to remain cautious, as sustained credit growth above 20% could pose risks to external-sector stability through higher consumption imports.
On the fiscal front, the bank said Sri Lanka’s 2026 Budget, announced on 7 November, remains aligned with the IMF’s revenue-focused consolidation framework and projects modest outperformance against IMF targets for revenue-to-GDP and the primary balance.
The revenue target of 15.4% of GDP for 2026 is viewed as conservative, with 2025 revenue expected to exceed 16% of GDP. Primary surplus targets of 2.5% in 2026 and 2.6% in 2027 are seen as achievable, despite higher planned investment spending.
Stronger revenue performance, contained inflation and lower financing costs are expected to continue improving debt affordability and support upward pressure on sovereign ratings in 2026.
In markets, a neutral outlook is maintained on LKR Bonds over three- and 12-month horizons, with rates on hold limiting scope for duration gains. Higher borrowing needs associated with a wider fiscal deficit could act as a headwind to bond yields.
In the foreign exchange market, gradual depreciation of the rupee against the US dollar is expected as the current account surplus narrows, with the exchange rate projected at 309 by mid-2026 and 315 by end-2026.