Fitch Ratings has warned that Sri Lanka’s public investment levels remain far below the targeted 40 percent of GDP, a shortfall that could significantly hinder the nation’s long-term economic growth potential. The international credit rating agency stressed that failure to implement planned investments will challenge the government’s future fiscal policies, especially those aimed at reducing public debt and narrowing the budget deficit.
According to Fitch Ratings, the newly presented budget shows that the government is still committed to medium-term debt reduction. After comfortably passing this year’s budget, Sri Lanka has shifted its focus toward stabilizing public finances over the coming years. The agency, however, emphasized that strong government revenue growth is essential to achieving next year’s fiscal targets without difficulty.
Fitch expects Sri Lanka’s budget deficit to reach 5.1 percent of GDP next year, which is higher than the government’s projected deficit of 4.5 percent for this year. The International Monetary Fund previously forecast a deficit of 5.4 percent for this year, an improvement from the 6.7 percent recorded in the previous budget cycle.
The rating agency also stated that Sri Lanka’s primary balance before interest payments will remain in surplus at 2.5 percent of GDP next year, according to the new budget proposal. Although this is lower than the 3.8 percent surplus expected this year, it is still above the IMF’s target of 2.3 percent. Fitch noted that the government aims to reduce the overall fiscal deficit to 3.8 percent of GDP by 2030 under its medium-term fiscal framework.
However, the agency highlighted a discrepancy between government forecasts and its own projections. Fitch believes next year’s deficit will exceed the figure presented in the budget, projecting a 4.6 percent shortfall. Government revenue is also expected to decline to 15.4 percent of GDP next year from 15.9 percent this year, though Fitch estimates it will be slightly lower at 15.3 percent.
Fitch cautioned that if Sri Lanka fails to increase tax revenue relative to GDP, the country will face escalating fiscal pressures. The agency reiterated that Sri Lanka’s high public debt continues to be one of its most significant economic vulnerabilities, underscoring the urgent need for sustainable revenue generation, investment growth and structural reforms.
