Stable outlook masks deep risks to Sri Lanka's economic recovery, says S&P

S&P Global Ratings has affirmed Sri Lanka's sovereign rating at 'CCC+/C' with a stable outlook, offering the country a measure of relief as it continues to recover from its 2022 debt default.

However, the agency's own report makes clear that this stability rests on fragile ground, one that could easily be disturbed by events unfolding well beyond Sri Lanka's shores.

The economy has shown genuine signs of improvement. Real GDP grew by 4.8 percent in the final quarter of 2025 and picked up further to 5.1 percent in the first quarter of 2026, surprising many observers.

Tax reforms have boosted government revenue, helping authorities narrow the fiscal deficit and strengthen the country's ability to service its debts.

These gains, however, have not come without cost.

Higher taxes and stricter fiscal discipline have squeezed households and businesses, even as they reassured international lenders.

Sustaining public patience while continuing reforms required under the IMF programme remains one of the government's toughest balancing acts.

S&P has flagged several risks that could unsettle this fragile progress.

Chief among them is the country's weakening external position. Rising imports, driven by stronger domestic activity, have increased demand for foreign currency, while uncertainty over tourism earnings and worker remittances raises questions about how those imports will be financed.

The ongoing Middle East conflict poses a threat as large numbers of Sri Lankan migrant workers are employed across the Gulf, and tourists from the region form a significant share of visitor arrivals.

Should the conflict drag on, rising global oil prices would push up fuel import costs, adding pressure to inflation and reserves alike.

Climate risks add another layer of concern. A stronger El Niño pattern expected through 2026 and 2027 could hurt agricultural output, reduce hydropower generation and slow economic growth, potentially undoing recent fiscal improvements and forcing higher public spending.

S&P has tied Sri Lanka's future rating path firmly to policy execution.

Continued progress on IMF backed reforms, including stronger revenue collection, cost recovery in utilities and better public financial management, will be essential for any future upgrade. Should reform momentum slip, funding pressures return, or external conditions worsen, a downgrade could follow.