IMF Reforms Paying Off? Fitch Keeps Sri Lanka at ‘CCC+’ Amid Recovery Signs

by Staff Writer 02-10-2025 | 2:40 PM

COLOMBO (News 1st); GGlobal credit rating agency Fitch Ratings has affirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC+’, citing continued fiscal and economic vulnerabilities despite notable progress under the country’s IMF-supported reform programme.

Fitch does not assign outlooks to sovereigns rated ‘CCC+’ or below, but the affirmation reflects a cautiously optimistic view of Sri Lanka’s post-debt restructuring trajectory, following the completion of its sovereign debt overhaul in 2024.

The rating remains constrained by elevated public debt, a high interest-to-revenue ratio, and structural fiscal weaknesses, even as the country demonstrates signs of recovery.

Fitch forecasts gross general government debt to reach 96% of GDP by 2027, well above the ‘CCC’ median of 74%.

However, the agency acknowledged substantial progress under the 48-month IMF programme, including:

The passage of the 2025 budget aligned with IMF targets, Restoration of cost-recovery pricing for electricity, Reforms in tax compliance, revenue administration, and state-owned enterprises.

Sri Lanka’s primary fiscal balance has improved significantly, shifting from a 5.7% deficit in 2021 to a 2.2% surplus in 2024, with an average surplus of 2.7% of GDP expected between 2025 and 2027.

Fitch projects the overall fiscal deficit to narrow to 4.2% by 2027.

On the external front, foreign exchange reserves have rebounded to USD 6.2 billion as of mid-2025, up from a low of USD 1.9 billion in 2022.

The external liquidity ratio has nearly doubled to 96.5%, and reserves are expected to rise further to USD 6.4 billion by year-end. The economy is also showing signs of stabilisation, with GDP growth of 5% in 2024 and 4.8% in the first half of 2025, driven by strong performance in industry and services.

Fitch forecasts full-year growth at 4.4%, moderating to 3.6% by 2027.

Inflation is expected to remain low but gradually rise to 5%, in line with the Central Bank’s target.

Despite these gains, Fitch warns that risks remain high, particularly beyond 2027, and that sustained reform momentum is essential to maintain macroeconomic stability and investor confidence.