• Fitch Ratings forecasts ratio decline by 2027, driven by lower interest costs and sustained govt. revenue
• Recovery may trigger higher debt pay-outs under MLBs, which Fitch expects can be managed by maintaining econ. growth

Fitch Ratings expects Sri Lanka’s interest/revenue ratio to fall to 46.5% in 2027, and narrowing of the fiscal deficit to 4.2% by 2027 as revenues keep the primary surplus steady and interest costs decline.

The rating agency assumes the first threshold of average US dollar GDP under conditions of macro-linked bonds (MLBs) will be triggered due to the economic recovery of Sri Lanka and stronger exchange-rate assumptions.

“This would result in higher principal and coupon payments from 2028. We expect this to be accommodated with debt declining if primary surpluses are maintained and GDP growth is sustained at 3.5% in line with our baseline,” it said.

Moreover, it said that although the 2025 budget targets an overall deficit of 6.7% of GDP, they see a 5.4% deficit owing to lower interest costs and spending under-execution.

Also, it said that they expect reserves to rise gradually to $ 6.4 billion by end-2025 on the expectation of the Central Bank continuing to make direct foreign exchange purchases.

“We forecast reserve coverage of current external payments at 2.8 months. Upfront debt relief from restructuring is benefiting external finances,” Fitch Ratings said.

Further, it expects a full-year growth at 4.4%, with 3.8% in 2026 and 3.6% in 2027.

US tariffs will be a growth headwind, but the revised reciprocal tariff rate of 20% is now in line with peers, reducing risks to exports. Fitch sees low average inflation, but to rise gradually to 5% in 2027, in line with the CBSL's inflation target.