Fitch Ratings has upgraded Sri Lanka’s long-term foreign-currency issuer default rating (IDR) to ‘CCC+’, from ‘RD’ (Restricted Default), marking a significant milestone in the country’s economic recovery process. Fitch also upgraded the Local-Currency IDR to ‘CCC+’, from ‘CCC-’, in line with the foreign-currency IDR, reflecting the reduced risk of default on local-currency debt following the completion of the international sovereign bond restructuring.
Sri Lanka completed a domestic debt optimization process in September 2023, converting treasury bills and provisional advances held by the Central Bank into new treasury bonds. This upgrade reflects Sri Lanka’s improved relations with creditors, with 98% participation in the debt exchange, restructuring 96% of total commercial external debt.
Fitch expects foreign-exchange reserves to reach $8.7 billion by 2026, bolstered by debt relief and continued efforts to restructure both commercial and official creditors. While the debt restructuring has alleviated liquidity risks, the country still faces challenges with a high debt-to-GDP ratio and interest/revenue ratios. However, Fitch anticipates that the government’s tax measures will boost revenue collection, contributing to future debt sustainability.
The country’s economy, which contracted in 2022 and 2023, is showing signs of recovery, with real GDP growth of 5.2% in Q3 2024. The government is committed to continuing its IMF-backed reforms, which Fitch expects will support Sri Lanka’s recovery and long-term stability.