S&P Global Ratings has affirmed its long- and short-term foreign and local currency sovereign credit ratings on Sri Lanka at ‘CCC+/C’, with a stable outlook on the long-term ratings.
The rating action, taken on July 27, was accompanied by an upgrade to one component of the assessment: S&P revised Sri Lanka’s transfer and convertibility assessment to ‘B-’ from ‘CCC+’.
The agency said the economy has remained resilient in the face of multiple external shocks, with strong revenue growth continuing to support fiscal repair and a steady decline in the government’s debt-servicing cost. Real GDP grew 4.8% in the fourth quarter of 2025 and 5.1% in the first quarter of 2026, exceeding S&P’s earlier expectations.
The stable outlook reflects the agency’s expectation that conditions allowing continued growth and fiscal repair will persist over the next six to 12 months, even as growth decelerates and current account deficits return.
S&P was more cautious on the external side. It warned that Sri Lanka’s external position may weaken this year because of a higher import bill and the effects of the Middle East war on remittances and tourism earnings, which could slow the rebuilding of reserves. Around one-third of visitors to Sri Lanka transit through Middle Eastern aviation hubs, and the region accounts for 40% of remittances.
The agency expects growth to slow to 3.8% in 2026 before rebounding to 4.2% in 2027 as energy supply chains normalise. It noted that CPI inflation had risen to 6.8% as of June 30, and that the Central Bank raised its policy rate by 100 basis points in May to anchor inflation expectations. General government interest costs remain heavy at about 45% of revenue.
S&P credited the government’s early response after the closure of the Strait of Hormuz — Sri Lanka was among the first countries to introduce fuel rationing and a shorter working week — and its post-cyclone relief efforts with containing the economic damage. It also cited improved political stability following the National People’s Power’s 2024 election mandate.
The agency said it could lower the ratings if renewed risks of funding and liquidity stress emerge, with significantly weaker external or fiscal performance a likely precursor. An upgrade would require continued growth that improves external and fiscal metrics and builds credit buffers.
