Sri Lanka’s economic recovery strategy following Cyclone Ditwah has exposed the fragile balance between urgent humanitarian reconstruction and the strict fiscal discipline required under the International Monetary Fund’s Extended Fund Facility (EFF).
According to the Disaster Management Centre (DMC), the cyclone has claimed 638 lives, with 175 people still missing as of December 28. Nearly 500,000 people from 149,460 families remain affected nationwide. The worst-hit district is Kandy, which recorded 241 deaths, followed by Badulla with 89 deaths and Nuwara Eliya with 80. More than 6,100 houses have been completely destroyed, while 114,314 have suffered partial damage, underscoring the scale of reconstruction needs.
In response, the IMF approved approximately US$200 million under its Rapid Financing Instrument (RFI), a one-off emergency facility designed to provide swift balance-of-payments support after external shocks. While the RFI carries minimal conditionality, the IMF stressed that the funds must be used transparently, strictly for disaster-related purposes, and without undermining macroeconomic stability.
Despite this emergency support, the IMF warned that Sri Lanka’s debt sustainability risks remain high. In a staff paper released last week, the Fund said there is no room for policy slippage, even amid reconstruction pressures. Sustained fiscal discipline remains central to restoring debt sustainability.
Before the cyclone, Sri Lanka had shown progress under the 48-month EFF programme launched in 2023, with improvements in revenue mobilisation, inflation control, and external stability. However, the disaster altered fiscal and growth projections, prompting the IMF to defer the Fifth Review, which could have unlocked US$347 million. An IMF mission is now expected in early 2026 to reassess macroeconomic conditions and revise programme targets under exogenous shock provisions.
The government has also announced plans to hold an international donor conference in early 2026 to mobilise grants and concessional financing. The IMF considers donor support critical, warning that reconstruction funded through domestic borrowing would further weaken debt sustainability.
Parliament has approved a Rs. 500 billion supplementary estimate for post-cyclone recovery. Following this, the 2026 Budget deficit was revised upward to 6.5% of GDP from an earlier estimate of 5.1%. The primary surplus forecast for 2026 has been cut to 1% of GDP, down from 2.5% and well below the 3.8% surplus recorded in 2025.
President and Finance Minister Anura Kumara Dissanayake said disaster-related financing would be met using nearly Rs. 2 trillion in existing government cash buffers, while maintaining the Rs. 3.74 trillion borrowing limit. The IMF is expected to closely scrutinise the financing, transparency, and time-bound nature of emergency spending before releasing further EFF disbursements
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