Fitch Ratings: Sri Lanka’s Budget Signals Commitment to Fiscal Reforms Amid Challenges

Fitch Ratings stated that Sri Lanka’s latest budget reflects the government’s commitment to increasing fiscal revenues as a share of GDP, a move that could help address long-standing weaknesses in the country’s credit profile.

However, the agency warned that significant risks remain, and a slowdown in fiscal consolidation could impact medium-term debt reduction prospects.

The budget, presented on February 17, is the first under President Anura Kumara Dissanayake and outlines the administration’s fiscal and economic reform agenda. Fitch noted that the budget aligns with its expectations from December 2024, when Sri Lanka’s credit rating was upgraded to ‘CCC+’ from ‘RD’ (Restricted Default).

Sri Lanka’s goal of raising revenue to 15.1% of GDP in 2025, up from 11.4% in 2023, surpasses Fitch’s earlier projection that this level would be reached by 2026. Key revenue increases are expected from taxes on external trade (36.5%) and income taxes (13.1%). However, Fitch highlighted that the success of these targets depends on the smooth liberalization of import restrictions, particularly for vehicles.

While the government aims for a primary budget surplus of 2.3% of GDP in 2025, interest payments are projected at 8.9% of GDP—higher than anticipated under Sri Lanka’s $3 billion Extended Fund Facility (EFF) with the IMF.

Fitch does not expect deviations from the EFF projections to lead to a suspension of IMF disbursements. However, it cautioned that slower fiscal consolidation, combined with optimistic growth projections of 5%, could limit debt reduction progress and leave Sri Lanka vulnerable to economic shocks.