New Delhi: Four years after Sri Lanka’s economic crisis spilled into every part of daily life and forced a change of power, the island country is showing signs of recovery. International credit rating agency Fitch Ratings has upgraded Sri Lanka’s long-term foreign-currency issuer default rating (idr) to ‘B-’ from ‘CCC+’, citing progress in economic stabilisation and structural reforms that have reduced the risk of external financing pressures.
The upgrade is a sign that Sri Lanka’s finances have stabilised from the depths of the 2022 crisis, but Fitch’s assessment also shows that the country remains financially vulnerable.
In 2022, fuel and food shortages, hours-long power cuts, and soaring prices brought the country to a standstill, as public anger spilled onto the streets.
The crisis was driven by a severe shortage of foreign exchange, which left Sri Lanka unable to pay for essential imports. The country suspended payments on its external debt in April 2022 and defaulted on its sovereign debt soon after. The crisis added to the pressure on households, triggered mass protests, and caused a change in government.
Since then, Colombo has raised taxes, restrained spending, and restructured its debt under a reform programme backed by the International Monetary Fund (IMF). The IMF’s 48-month-long Extended Fund Facility, approved in 2023 under the Ranil Wickremesinghe government, is worth about $3 billion.
Fitch said Sri Lanka’s fiscal and external balances have improved, while foreign exchange reserves have begun to rebuild. It expects continued fiscal discipline and stronger government revenues to keep the country’s debt-to-GDP ratio on a downward path.
Also read: From screen to shelf: Netflix donates adapted novels to 100 UK public libraries
Sri Lanka’s economic outlook
The agency forecasts a primary fiscal surplus of 2.6 per cent of GDP in 2026, down from 5.4 per cent in 2025. A primary surplus means government revenues exceed spending before interest payments on debt are taken into account.
Government debt is expected to fall to 92.9 per cent of GDP in 2026, from 96.7 percent in 2025. But that remains well above the 54.7 per cent median for countries in Fitch’s ‘B’ rating category.
Sri Lanka also remains vulnerable to external shocks. Higher energy prices, linked partly to the US-Iran conflict, are expected to push the country’s current account deficit into 1.2 per cent of GDP in 2026, after three consecutive years of surpluses of 1.5 per cent. Rising remittances are helping cushion the impact.
Fitch expects foreign exchange reserves to reach $7.7 billion by the end of 2026, enough to cover about 2.9 months of external payments. But it cautioned that reserves remain modest as Sri Lanka faces larger external debt repayments over the next five years, particularly after 2028.
Fitch forecasts GDP growth of 4.1 per cent in 2026, compared with an average of 5 per cent over the previous two years, as the economy absorbs the after‑effects of Cyclone Ditwah in 2025 and higher import costs. Inflation is forecast to average 6.3 per cent this year, up from negative 0.5 per cent in 2025, before moving toward the central bank’s 5 per cent target next year. The global energy shocks and El Nino have added to the domestic price pressures.
Sri Lanka’s current IMF programme is scheduled to end in March 2027. Fitch said the government is considering a return to international bond markets in 2027, but the country’s ability to withstand external shocks will depend on continued reforms and stronger reserves. For another rating upgrade, Fitch said, Sri Lanka would need to substantially reduce its government debt and interest burden, and build up foreign exchange reserves through stronger remittances and export earnings.
(Edited by Aamaan Alam Khan)