• Debt burden to fall to 95% of GDP by end-2024, post-restructuring
• Fiscal reforms and revenue measures to improve debt affordability

Moody’s Ratings expects Sri Lanka’s debt burden to decline to around 95% of GDP by end-2024, following the restructuring of dollar bonds, and to below 90% within the next two to three years.

Accordingly, Moody’s Ratings Sri Lanka’s debt affordability will remain among the weakest across sovereigns it rates and constrains its credit profile.

However, it expects Sri Lanka’s debt burden to decline to around 95% of GDP by the end of this year after the restructuring of international bonds, and to below 90% within the next two to three years from a peak of 114% at the end of 2022, the debt burden will remain high compared to peers.

Although the revenue base is supporting a substantial improvement in debt affordability for Sri Lanka, interest payments are expected to continue to absorb a very high level of around 40-50% of government revenue into the foreseeable future.

Also, it said that it projects foreign exchange reserves to rise to cover more than four months of imports and all of the country’s external debt due by the end of 2025 and over the following two to three years.

“At the same time, the external repayment profile will remain benign at less than 2% of GDP annually over the next few years even as debt repayments fully resume post-restructuring, and we expect the government’s gross financing needs to fall to average around 15% of GDP,” it added.

Further, Moody’s Ratings expects Sri Lanka’s fiscal deficit to narrow to 5-6% of GDP in 2025-26, compared to their estimate of 7% of GDP for 2024 and an average deficit of 11% of GDP in 2021-22 around the time of the default.

It added that the reduction in the deficit has been driven by revenue measures that significantly widened the government’s revenue base from 8.3% of GDP in 2021-22 to their estimate of around 14% of GDP in 2024.

“These revenue measures include raising the value added tax and corporate income tax rates, lowering the personal income tax free allowance, and strengthening tax administration,” Moody’s Ratings said.