Investing.com – Moody’s Ratings affirmed Sri Lanka’s Caa1 foreign currency long-term issuer rating and senior unsecured rating on Monday, maintaining a stable outlook. The affirmation reflects weak debt affordability and an elevated debt burden despite progress in restoring macroeconomic stability since the 2022 crisis.
Fiscal reforms under the International Monetary Fund program have strengthened revenue generation and supported sustained primary surpluses, but interest costs continue to absorb a large share of government revenue. Government debt is projected at 95% of GDP and over 580% of government revenues in 2026, while interest costs absorb over 40% of revenue. External vulnerability remains high with import coverage ratios below three months and an external vulnerability indicator ratio above 250%.
The stable outlook reflects balanced risks at the current rating level. Sri Lanka remains exposed to external shocks including effects of the Middle East conflict through energy prices, tourism flows and balance of payments dynamics. Physical climate risks remain a significant credit challenge given the country’s exposure to severe weather events.
Longer-term growth prospects remain uncertain despite robust near-term recovery. Social vulnerabilities, emigration of skilled workers and lingering weaknesses in private investment continue to weigh on the economy’s productive capacity. Moody’s expects medium-term growth to remain moderate with potential growth around 4%.
The current IMF program is scheduled to conclude in 2027, after which Sri Lanka will lose both a policy anchor and a key source of concessional external financing. The period following program expiry will test the durability of reform commitment as external debt service obligations rise gradually from 2028.
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