By: Staff Writer
December 21, Colombo (LNW): Sri Lanka is entering 2026 facing a rare combination of opportunity and risk. The Government’s decision to deploy a Rs. 500 billion supplementary estimate for post-Cyclone Ditwah recovery, alongside a request for $200 million under the IMF’s Rapid Financing Facility (RFF), has ignited debate over whether the economy can withstand another major shock so soon after emerging from a sovereign debt crisis.
President and Finance Minister Anura Kumara Dissanayake has dismissed warnings of an impending economic collapse as alarmist, arguing that the country’s strongest fiscal performance on record has created sufficient space to absorb disaster-related spending without destabilising macroeconomic fundamentals. According to the Government, the supplementary allocation will be financed without increasing borrowing limits or adding to public debt—a claim that marks a sharp departure from Sri Lanka’s historical reliance on overdrafts and deficit financing.
The fiscal turnaround is undeniable. Government revenue in 2025 reached 15.9% of GDP, the highest since 2007, while the budget deficit narrowed to 4.5%—the lowest since 1977. For the first time in post-Independence history, revenue collections exceeded annual targets, crossing Rs. 5.12 trillion by early December. Most strikingly, the Treasury moved from chronic overdrafts to a surplus of Rs. 1.2 trillion by November 2025, reversing years of fiscal fragility.
These gains have allowed the Government to mobilise nearly Rs. 700 billion for recovery—combining the supplementary estimate, redirected capital expenditure, and Treasury surpluses—without breaching parliamentary borrowing ceilings. Sri Lanka also recorded a primary surplus of 3.8% of GDP in 2025, the highest ever, a milestone rarely achieved even during periods of economic stability.
Yet the real test lies ahead. Cyclone Ditwah struck at a moment when the economy was stabilising but not fully resilient. The President himself acknowledged that while Sri Lanka can now manage shocks better than before, it still lacks the depth to absorb large-scale disruptions without consequences. Injecting Rs. 500 billion into the domestic economy risks reigniting inflationary pressures and widening the balance-of-payments gap, particularly given the import intensity of construction and reconstruction activities.
Officials estimate that road construction alone carries an 18% foreign exchange component. As recovery spending accelerates, demand for dollars will inevitably rise, placing pressure on reserves unless matched by external inflows. This explains the urgency behind the IMF RFF request and anticipated support from the World Bank and Asian Development Bank. The Government estimates that an additional $500 million in external financing will be needed in 2026 to prevent balance-of-payments stress.
The administration is attempting to mitigate these risks through phased spending, tighter project sequencing, and the appointment of a special commission to channel funds into productivity-enhancing investments rather than pure consumption. The forthcoming World Bank damage assessment on Ditwah is expected to play a critical role in prioritising reconstruction needs and avoiding wasteful expenditure.
Encouragingly, external sector indicators remain supportive. Foreign direct investment inflows are projected to reach record highs, tourism earnings are expected to surpass the 2018 peak of $3.8 billion, and merchandise exports are forecast to approach $18 billion. These inflows could provide a crucial buffer as recovery spending gathers pace.
However, fiscal discipline alone will not guarantee success. Implementation risks loom large. Disbursement delays, weak local-level coordination, and governance challenges could blunt the effectiveness of relief programmes. As Sri Lanka heads into 2026, the economy’s resilience will depend not only on how much money is spent, but how efficiently, transparently, and strategically it is deployed
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