Sri Lanka entered the current cyclone season with something it had worked hard to regain: economic resilience.
Strong reform implementation had strengthened the economy’s defences, and by the time the cyclone made landfall, a solid recovery was already underway. Macroeconomic stability had been restored, gross international reserves had increased to cover three months of imports, and inflation had remained low. On this firmer footing, economic growth is projected to return to its potential—around 3.1 percent by 2027—with inflation easing back to target levels.
This optimism is not without basis. Sri Lanka has a history of rebounding from national disasters, with reconstruction efforts often supporting growth. From 2027 onwards, the current account deficit is expected to narrow, supported by a recovery in tourism, a pickup in agricultural exports, and the gradual decline in imports related to emergency relief and reconstruction.
However, the outlook remains highly uncertain. According to the IMF Sri Lanka Country Report, December 2025, risks to the economy are firmly tilted to the downside. The cyclone has disrupted the recovery and intensified external and debt sustainability risks, compounding existing vulnerabilities.
The IMF warns that a reimposition of higher tariffs by the United States could weaken exports and growth. Prolonged global trade policy uncertainty and ongoing geopolitical tensions may further dampen tourism while increasing commodity price volatility—particularly dangerous at a time when Sri Lanka remains highly exposed to fluctuations in food and fuel prices.
At the same time, administrative capacity constraints are likely to emerge as government resources are diverted toward disaster response and reconstruction. These pressures could delay the implementation of critical structural reforms needed to achieve long-term development goals.
On the positive side, the reconstruction phase presents an opportunity to “build back better” and strengthen long-term resilience. Yet this too carries risks. Weak coordination and implementation delays could lead to under-execution, reducing the effectiveness of reconstruction efforts.
Debt dynamics reflect both progress and caution. Between 2022 and 2024, Sri Lanka’s debt restructuring provided significant relief and placed public debt on a more sustainable trajectory. Public debt-to-GDP declined from 125.8 percent to 105.7 percent, gross financing needs fell from 33.9 percent to 21.9 percent of GDP, and the interest-to-revenue ratio improved from 79 percent to 56 percent. Nevertheless, post-restructuring debt indicators remain elevated.
The IMF stresses that authorities must carefully balance supporting recovery and reconstruction while preserving debt sustainability, making fiscal discipline essential.
Emergency spending will be the greatest test of this discipline. All expenditures must strictly comply with the mechanisms set out in the Public Finance Management (PFM) Act. Any supplementary allocation under the 2026 Budget should follow established procedures and be used only when needs cannot be met through budget reallocations, the annual budget reserve, or the Contingencies Fund.
Any breach of the primary expenditure ceiling must be justified under the PFM Act’s escape clauses and accompanied by a clear recovery plan, including corrective measures in subsequent budgets.
Draft PFM regulations—covering budget execution, fiscal rules, and enforcement—are currently being finalised and will further strengthen safeguards, even during emergencies. Looking ahead, the IMF recommends that Sri Lanka enhance financial preparedness for future disasters through dedicated disaster funds, insurance, and other risk-transfer mechanisms.
Strong governance will be equally critical. All emergency spending—including funds channelled through the Rebuilding Sri Lanka Fund and donor assistance—must meet the accountability and transparency standards of the PFM Act and related governance frameworks.
This includes publishing procurement contracts and disclosing beneficial ownership information on official government websites to ensure public access. Any procurement deviations permitted during disaster response should follow National Procurement Commission guidelines and be fully documented and disclosed. Regular public reporting and independent audits will be vital to ensure funds are used as intended.
Source: IMF Sri Lanka Country Report, December 2025
