Moody’s Ratings affirmed Sri Lanka’s Caa1 foreign-currency long-term issuer rating and senior unsecured debt rating on Monday, maintaining a stable outlook. The decision reflects modest improvements in macroeconomic stability since the 2022 crisis, though the sovereign’s debt profile remains heavily strained.
The affirmation follows fiscal reforms under the International Monetary Fund’s ongoing program, which has supported primary budget surpluses and strengthened revenue collection. Government debt is projected to reach 95% of GDP in 2026, while interest costs are expected to consume over 40% of government revenue. Debt relative to revenue is projected to exceed 580%, underscoring weak debt affordability despite recent progress.
External vulnerabilities remain elevated, with import coverage ratios below three months and an external vulnerability indicator ratio above 250%. Sri Lanka’s exposure to external shocks—including energy price volatility and tourism disruptions tied to Middle East geopolitical tensions—further complicates the outlook. Medium-term growth is forecast to hover around 4%, constrained by structural challenges such as skilled labor emigration and subdued private investment.
The IMF program, scheduled to conclude in 2027, has provided a policy anchor and concessional financing. However, rising external debt service obligations from 2028 onward will test the government’s commitment to reforms once the program ends. Moody’s noted that sustaining fiscal discipline and rebuilding external buffers will be critical to avoiding further rating pressure.
