Sri Lanka’s government will continue to grapple with a steep debt burden over the next few years, with interest payments projected to consume over half of government revenue until 2027, according to a new report by Moody’s Investors Service.
The ratings agency forecasts that interest payments will amount to 60% of government revenue in 2025, gradually declining to 56% in 2026 and 52% in 2027. Despite this, the report highlights signs of improving fiscal stability and declining external vulnerabilities.
Moody’s expects Sri Lanka’s central government debt to remain high—at 99% of GDP in 2025—before edging down to 96% in 2026. However, this trend is reflective of broader improvements observed across Ghana, Suriname, Zambia, and Sri Lanka, all of which are showing fiscal recovery and modest benefits from debt restructuring.
Sri Lanka, along with Ghana, faces the most severe interest burdens among the four countries reviewed. Yet, Moody’s notes that rising revenues and continued policy reforms are beginning to ease pressure. The country’s foreign exchange reserves have started to rebuild, supported by external financing from development partners and a reduction in external repayment obligations.
By the end of 2024, Sri Lanka’s reserves are expected to cover three months of imports, exceeding pre-default levels. The external vulnerability indicator, which measures exposure relative to reserves, is projected to fall from 163% in 2024 to 134% in 2025 and further to 92% in 2026.
On the fiscal front, the primary balance is forecast to reach 2.1% of GDP in 2025 and improve to 4% in 2026. Meanwhile, the overall fiscal deficit is expected to narrow from 7% of GDP in 2025 to 4.5% in 2026.
Moody’s also projects a decline in both domestic and foreign borrowing requirements. Local currency borrowing is anticipated to drop from 16% of GDP in 2025 to 14% in 2026, while foreign currency borrowing is expected to decrease from 5% to 4% over the same period.
These improvements suggest Sri Lanka is on a slow but steady path to fiscal stabilization, even as high interest costs continue to weigh on government finances.