Fitch Ratings has noted that political risks to Sri Lanka’s debt restructuring process have reduced following the authorities’ endorsement of the IMF programme targets and agreement to proceed with debt restructuring terms established with international bondholders in September.
The election of Anura Kumara Dissanayake as president in September had initially caused uncertainty, raising concerns over potential challenges to the IMF programme. However, consultations with the IMF and Sri Lanka’s Official Credit Committee, concluded on October 4, indicate that policy changes under the new government are unlikely to disrupt the debt treatment agreement.
Fitch also highlighted that the debt restructuring agreement respects the principle of comparability between official creditors and bondholders, a key aspect of the IMF programme. Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) remains at ‘RD’ (Restricted Default) since May 2022, but completion of a successful debt restructuring could lead to an upgrade. The country’s debt is projected to remain high, with the IMF forecasting a gradual decline to about 103% of GDP by 2028.
Sri Lanka’s revenue collection has improved significantly, rising by 43% year-on-year in the first seven months of 2024, driven by revenue-raising measures implemented since 2022. However, future fiscal policies could be affected by the outcome of the parliamentary elections scheduled for November 14, which may reshape the composition of the legislature.
Despite challenges, Sri Lanka’s economy is on a recovery path, with real GDP growth at 5.0% year-on-year in the first half of 2024, following a contraction in 2023. External liquidity has also improved, with foreign reserves reaching USD 6.0 billion in August 2024, though this could be impacted once debt payments resume.