S&P's also said it raised all the issue ratings on Sri Lanka's senior unsecured debt accordingly.
Standard & Poor's confirmed its transfer and convertibility assessment of 'B+', and its recovery rating of '4' on Sri Lanka's senior unsecured foreign currency debt.
This signals the expectation of an average recovery of 30-50 percent in the event of a distressed debt exchange or payment default, the rating agency said.
"The rating upgrade takes into account the continued strengthening of Sri Lanka's balance-of-payments position," said Standard & Poor's credit analyst Agost Benard.
"(It also) reflects Standard & Poor's expectation that the government's planned revenue reforms will improve public finances, such that fiscal deficits and public debt will decline again in a sustainable manner."
These positive factors are balanced against ongoing risk posed by excessive public and external leverage