Moody's flags SL's weak revenue risks, external funding reliance

Completes periodic review, says growth to moderate to 4.5% in 2025 Fiscal deficit projected to narrow to 6-6.5% of GDP with primary surplus intact

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MOODY'S Ratings said Sri Lanka's macroeconomic recovery remains broadly on track, supported by fiscal reforms, a rebound in tourism and stronger remittance inflows, but cautioned that high debt levels, limited fiscal space and continued dependence on external financing still pose significant risks.

In its latest periodic review released on last Friday, Moody's reaffirmed Sri Lanka's Caal sovereign rating with a stable outlook, noting that while Government liquidity pressures have eased since the 2022 default and debt restructuring, debt affordability remains weak.

The agency said real GDP grew 4.8% year-on-year in the first half of 2025, following 5% growth in 2024, but expects the pace to ease to around 4.5% by year-end as base effects fade. Higher social spending is expected to bolster consumer demand, while tourism's recovery to near pre-pandemic levels and increased investment will drive medium-term growth.

Moody's projected a fiscal deficit of 6-6.5% of GDP in 2025, narrowing from 6.8% in 2024, as revenue grew 26.5% yearon-year in the first seven months of 2025, aided by the lifting of vehicle import restrictions and stronger tax receipts. The primary balance is expected to remain in surplus, contributing to gradual debt reduction.

The agency expects the current account to stay in surplus this year, supported by tourism and remittances, even amid a rise in vehicle imports. However, it warned that Sri Lanka's narrow revenue base and heavy reliance on external funding remain key vulnerabilities, particularly if the global environment turns less favourable.

Moody's said sustained reform momentum under the IMF program could strengthen Sri Lanka's credit profile, but any policy reversal or weakening in external buffers would increase downside risks to the outlook.