• Government debt-to-GDP expected to decline over the next two years
• External vulnerabilities easing due to reserve growth and policy reforms

Sri Lanka’s interest payments are expected to stay above 50% of government revenue till 2027 while external vulnerabilities continue to reduce with reserve building, Moody’s said.

Moody’s said that central government debt is expected to remain at 99% of GDP in 2025 and reduce to 96% in 2026, with interest payments taking up 60% of government revenue in 2025, 56% in 2026 and 52% in 2027.

In a special report on Ghana, Surinam, Zambia, and Sri Lanka, Moody’s said government debt is declining in all four countries, mostly because of improving fiscal positions. Restructuring is also helping to reduce debt, but to a limited degree.

It said that interest payments continue to absorb significant government revenue. However, in Sri Lanka and Ghana, which have the worst interest burdens of the four countries, revenue expansion has fostered a marked improvement.

It also said that the policy reforms, together with reduced external repayment outflows and continued external financing inflows from development partners, are helping Sri Lanka rebuild foreign exchange reserves and lower external risks.

“In 2024, the degree to which foreign exchange reserves covered imports exceeded pre-default levels in Sri Lanka and Suriname,” Moody’s said.

The external vulnerability indicator, which is a measure of external exposure as a percentage of foreign exchange reserves, is expected to reduce to 134% in 2025 from 163% in 2024, with three months of import cover expected in reserves by year-end and further reduce to 92% in 2026.

Moreover, Moody’s said that it forecasts the primary balance to reach 4% of GDP in 2026 after reaching 2.1% in 2025, with the fiscal deficit expected to reduce to 4.5% from 7% in 2025.

Further, Moody’s said the local currency borrowing requirement of Sri Lanka is expected to be at 16% of GDP in 2025 and 14% of GDP in 2026, with foreign currency borrowing requirement remaining at 5% and 4% in the two years, respectively.