S and P Global Ratings has affirmed Sri Lanka’s long- and short-term foreign and local currency sovereign credit ratings at ‘CCC+/C’ with a stable outlook, citing expectations that economic growth and fiscal consolidation will continue despite mounting external risks.
The ratings agency said the stable outlook reflects its expectation that conditions supporting economic growth and fiscal repair will persist over the next six to 12 months, even as growth moderates and the current account returns to deficit.
However, it cautioned that risks to external demand, inflation, and financing conditions remain elevated, limiting the scope for a near-term improvement in Sri Lanka’s sovereign credit profile.
S and P also revised Sri Lanka’s transfer and convertibility assessment to ‘B-‘ from ‘CCC+,’ while maintaining that the country’s creditworthiness remains vulnerable but is no longer facing an immediate funding or payment crisis. It said continued official financing, together with the Government’s reform agenda, should support fiscal and external improvements.
The agency expects Sri Lanka’s economy to expand by 3.8% in 2026, slowing from 5.1% growth recorded in the first quarter, before recovering to 4.2% in 2027 as energy supply disruptions ease. It said higher fuel and input costs linked to the Middle East conflict could weigh on economic activity over the coming quarters, although Government measures to secure fuel and fertiliser supplies have helped contain the impact.
S and P said Sri Lanka remains more exposed than many regional peers to prolonged disruptions in global energy markets because of its dependence on imported fuel and fertiliser, limited storage capacity, and still-fragile external buffers following the 2022 economic crisis. It also warned that weaker tourism earnings and remittance inflows could add pressure if instability in the Middle East persists.
On the fiscal front, the agency said revenue performance has remained strong following the lifting of vehicle import restrictions and tax measures introduced under the International Monetary Fund (IMF)-supported reform program. It expects higher spending on post-disaster reconstruction and energy-related subsidies to widen the fiscal deficit to 5% of GDP in 2026 before narrowing towards 4% by 2029. Net general Government debt is projected at about 92% of GDP this year, declining to around 83% by 2029.
S and P said it expects the Government to continue implementing structural reforms under the IMF Extended Fund Facility (EFF) program, including revenue-based fiscal consolidation, cost-reflective utility pricing, and improvements to public financial management. It noted that the administration has maintained a strong commitment to the reform program despite some implementation delays.
The agency forecasts Sri Lanka’s current account will return to a deficit of 1.7% of GDP in 2026 as imports rise, although inflows from the IMF and other multilateral lenders are expected to partly offset the deterioration. It also noted that gross official reserves declined to $ 6.45 billion in June from $ 6.88 billion in May, while tourist arrivals fell nearly 10% in June and growth in remittances slowed.
S and P said it could raise Sri Lanka’s sovereign ratings if sustained economic growth leads to further improvements in fiscal and external metrics, strengthening the Government’s capacity to manage its debt obligations. Conversely, it said renewed funding or liquidity pressures arising from weaker fiscal or external performance could result in a downgrade.