Sri Lanka’s 2025 Budget Fitch Ratings warned that risks remain strong The country’s fiscal stability remains substantial.
Commenting on President Anura Kumara Dissanayake’s maiden budget on Monday, the ratings agency said that the proposed revenue measures, if implemented as planned, could help address a long-standing weakness in the country’s debt profile.
However, Fitch warned that the government’s decision to slow the pace of fiscal consolidation could hamper debt reduction efforts in the medium term.
The budget provides “greater clarity” on the administration’s economic reform agenda and is consistent with the December 2024 assessment, which raised Sri Lanka’s rating to ‘CCC+’ from ‘RD’ (limited default). The 2024 budget deficit of 6.8 percent of GDP was in line with the agency’s expectations.
A key focus of the 2025 budget is to accelerate revenue collection. The government expects revenue to increase from 11.4 percent in 2023 to 15.1 percent of GDP in 2025, exceeding Fitch’s baseline assumption that it would only reach this threshold by 2026. The budget projects revenue from taxes on external trade to increase by 36.5 percent and income tax revenue by 13.1 percent.
Fitch believes that this ambitious target can be achieved, as revenue-raising measures have already been announced and implemented. However, much depends on a smooth easing of import restrictions, particularly on vehicles.
“There is a risk that the authorities could look to slow down the process if high imports weaken Sri Lanka’s external stability, for example by eroding foreign exchange reserves,” the ratings agency warned.
“The medium-term fiscal outlook for Sri Lanka remains challenging and we believe that revenue growth is likely to slow sharply from 2026 onwards unless additional policies are introduced.”
Despite the revenue increase, Sri Lanka’s public finances remain fragile. In 2025, the budget projects only a modest reduction in the fiscal deficit to 6.7 percent of GDP, reflecting a sharp increase in public spending. Public capital spending will increase by 61 percent, while wages, salaries and subsidies will increase by 12 percent and 11 percent, respectively.
“The deficit could be smaller than the government intends if such a large capital increase proves difficult to implement,” Fitch noted.
However, it warned that keeping public investment at the low levels seen in 2024 (2.7 percent of GDP) could dampen Sri Lanka’s medium-term growth prospects, even as other budget measures seek to attract private investment in export-oriented sectors and infrastructure.
The fiscal consolidation path of the budget under Sri Lanka’s four-year, US$3 billion Extended Fund Facility (EFF) program with the International Monetary Fund (IMF) is also slower than initially expected.
The government still expects to achieve a primary budget surplus target of 2.3 percent of GDP in 2025, while interest payments, forecast at 8.9 percent of GDP, are significantly higher than expected under the IMF program.
“We assume that the deviation from the program projections implied by the budget will not prompt the IMF to suspend disbursements under the EFF,” Fitch said.
“However, given that the government’s projected medium-term growth rate is 5%, well above the EFF’s expectation, the slow pace of fiscal consolidation is significant.”
On February 28, the IMF Executive Board will meet with Sri Lanka to assess the third review of its program.
Fitch warned that limited progress on debt reduction could weigh on Sri Lanka’s debt profile and leave the government with little room to maneuver in the event of economic shocks.
