Debt at 87.8% of GDP: the road back
The deficit missed last year's target, the Chagos money did not arrive and dropping the pension means test costs Rs 6.2bn. Can debt still fall? Jamaica shows how; Sri Lanka shows what happens if it doesn't.
In short
Public-sector debt was Rs 681.9bn: 87.8% of GDP at end-June 2026. The Government targets below 80% by June 2029.
Last year's target was missed: the deficit came in at 6.0% of GDP (Rs 46.5bn) instead of 4.9%, mainly because the expected Rs 10bn from the Chagos agreement did not arrive, with it, the deficit would have been 4.7%.
For 2026-27 the deficit is targeted at 3.7% (Rs 31.2bn), but that counts on Chagos receipts; without them, EY calculates it would be 4.95%.
Even as the ratio falls, the debt in rupees keeps rising (to about Rs 782bn by 2028-29). Interest costs about Rs 30bn a year (+12%): more than the whole capital budget.
Jamaica cut government debt from about 140% to about 62% of GDP in twelve years (IMF); Sri Lanka waited too long and defaulted in 2022.
How debt got here
COVID pushed debt above 90% of GDP in 2020. Fast nominal growth brought it down to about 81% by 2023 (IMF measure), but heavy spending around the 2024 election pushed it back up, and the new government's review found the finances weaker than reported. The 2025-26 Budget set out to repair this, but delivered less than planned: the deficit was 6.0% of GDP, not 4.9%, because the Rs 10bn expected from Chagos did not arrive (without that shortfall it would have been 4.7%, according to the Budget speech).
The 2026-27 Budget revises the path: gross public-sector debt from 87.8% of GDP in 2025-26 to below 80% by June 2029, with the deficit falling to 3.7% in 2026-27 and 3.0% in 2027-28. Rating agencies are watching: the Budget itself warns that a downgrade to “junk” status would weaken the rupee and raise import prices and loan rates.
The debt keeps rising in rupees
A falling debt ratio does not mean the State is repaying debt. It means the economy (GDP) is growing faster than the debt. According to the Budget's own projections, public-sector debt rises from Rs 682bn in 2025-26 to about Rs 782bn in 2028-29, while the ratio falls because nominal GDP is expected to grow from Rs 777bn to over Rs 900bn. That makes the plan dependent on growth and inflation, if growth disappoints, the ratio stalls.
Where the money goes
Of Rs 266.7bn of spending in 2026-27, the largest items are social protection (Rs 89bn, mostly pensions), general public services (Rs 78bn, which includes interest), education (Rs 26bn), health (Rs 21bn, +45%) and public order (Rs 19bn). Interest alone is about Rs 30bn: 11% of all spending and more than the Rs 26bn capital budget. Every year debt stays high, that money is unavailable for hospitals, schools or roads.
What it means for you
Public debt can feel abstract, but it reaches every household in a few concrete ways.