Fitch warns debt risks loom after 2027 for SL despite fiscal gains

Sri Lanka’s revenues jumped 27 percent in the first seven months of 2025, pushing the island nation into a primary surplus and helping foreign reserves recover to US$ 6.2 billion. However, Fitch Ratings warned that debt and interest burdens will remain far above peer levels despite reforms.

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The rating agency projects average primary surpluses of 2.7 percent of GDP between 2025 and 2027, after a sharp turnaround from a deficit of 5.7 percent in 2021 toa surplus of 2.2 percent in 2024.

The 2025 budget targets an overall deficit of 6.7 percent of GDP, but Fitch expects a narrower 5.4 percent gap due to lower interest costs and spending under-execution. By 2027, the deficit is forecast to shrink further to 4.2 percent. Revenues-to-GDP are expected to stabilise at about 15.3 percent over 2026-2027, below the ‘CCC’ median of 22.5 percent. Tax revenue, which accounts for nearly 93 percent of state income, climbed 28 percent year-on-year in the January-July period. Fitch said additional revenue-enhancing measures still in the pipeline provide upside to its projections.

Despite these fiscal gains, Fitch said debt remains “elevated” even after the sovereign's restructuring in 2024. Gross government debt is projected at 96 percent of GDP in 2027, compared with the 74 percent median for ‘CCC:rated peers. The interest-to-revenue fatio, though easing, is still seen at 46.5 percent in 2027 versus a 14.3 percent median.