• Ability to deploy fiscal buffers provides reassurance; risks of slower recovery remains

Sri Lanka is confronting one of its most disruptive weather events in recent memory, with Cyclonic Storm Ditwah triggering continuous floods, landslides, and widespread displacement across the country. 

The severity of the crisis has raised urgent questions about the resilience of an economy that only recently began to stabilise after several years of contraction. As the storm cuts across provinces and uproots daily life, the cost to businesses, households, and the recovery trajectory is becoming unclear by the hour.

President Anura Kumara Dissanayake has directed district secretaries to move ahead with rescue and relief operations without hesitation over funding. The Government has released Rs. 1.2 billion for immediate disaster response, while Rs. 30 billion has been allocated in the 2025 Budget for emergency needs. 

The President instructed officials to use all funds currently at their disposal and seek additional allocations if required. A new administrative circular has been ordered to prevent delays. The Sri Lanka Army has taken over the management of relief centres for displaced families, and a coordination unit will be set up at the Defence Headquarters with 10 dedicated hotlines to support emergency communication.

Heavy rainfall driven by a persistent low-pressure system has saturated the soil in the central highlands and northern region, pushed major reservoirs to critical levels, and damaged public infrastructure across several districts. Electricity failures have crossed 65,000 incidents, while more than 20,500 Army personnel have been deployed for rescue operations. 

Districts such as Vavuniya, Mullaitivu, Kandy, Mannar, Ratnapura, Anuradhapura, and Trincomalee have reported extreme rainfall within 24 hours. Train services across all routes were suspended and international schools were ordered to close. Several major roads in Colombo are blocked by floods or fallen trees, while Police leave has been cancelled until the end of the month.

Families in the north and east have faced difficulties during evacuations because many fear theft of property. The Disaster Management Centre (DMC) reported at least 132 deaths, over 170 missing, and over 600,000 affected individuals as of yesterday (29) 2 p.m. Entire communities remain without stable shelter, electricity, or transport. 

For a country still rebuilding fiscal buffers and living standards, the timing and intensity of the disaster bring renewed pressure.

An economy still vulnerable

Economists note that Sri Lanka’s ongoing recovery, while promising in several indicators, remains vulnerable to supply disruptions. 

The final quarter of the year is typically a critical period for consumer demand, remittances, tourism, and industrial production. The festive season also tends to see higher food inflation. Cyclone-related destruction intersects with these seasonal patterns and raises the possibility of slower growth, particularly if the storm’s impact lingers into December.

Negative effects anticipated 

Advocata Institute Chief Executive Officer (CEO) Dhananath Fernando said that the crisis would have a negative effect on economic activity, although the full scale would be evident only after the situation settled. 

He explained that growth in the final quarter was likely to slow because the disruption affected factories, employment, and industrial zones that may face further damage in the next few days. He added that while prices of some goods would rise, the inflation risk depended on the nature of the disruption.

Fernando further observed that inflation was usually driven by monetary pressures rather than supply shocks alone. He noted that when a specific item, such as potatoes, became scarce due to floods, consumers may shift to substitutes. However, if the storm causes deep and prolonged supply chain disruptions, the economy may contract regardless of the inflation data. 

“Prices will rise in some categories, particularly if electricity infrastructure suffers further damage and if the Government is forced to adjust rates to fund recovery,” he said.

He noted that it was more important to monitor the impact on growth than headline inflation figures at this stage.

On fiscal relief, Fernando said: “The Government has already invested heavily in immediate rescue efforts, and while money is tight, the situation is manageable because of stronger performance last year.” He noted that Sri Lanka could seek support from development partners when necessary.

At a time when households are balancing end-of-year expenses and uncertainty, the question of inflation has drawn close attention. Last December recorded negative inflation due to a contraction in demand after the crisis period. This year, however, the storm adds a new variable to the usual seasonal cycle.

Relief measures likely

First Capital Holdings Chief Research and Strategy Officer Dimantha Mathew said November, December, and January typically reported a rise in food inflation. 

He expects an increase on a month-on-month basis during this period, but he does not expect a large year-on-year rise because last year’s deflation sets a low base. He estimated year-on-year inflation for the festive period to remain around 2–2.5%. 

“The more immediate effect will be on short-term price movements driven by interruptions to supply chains,” he noted. 

Mathew added: “The Government is likely to introduce relief measures because the Treasury has a surplus of about Rs. 1 trillion that has not been utilised.” He said this provided room for targeted support, and opining that sufficient funds were available for relief.

As businesses attempt to resume operations, the risks of sustained interruption have grown. Industrial zones near affected regions may face delays. Logistics routes are blocked by fallen trees, high water, or damaged bridges. Farmers in several districts have lost their crops, livestock, and equipment. These losses will have spillover effects on wholesalers and retailers at a time when many normally rely on heightened seasonal demand.

Cash surpluses can be utilised for emergency spending  

Verité Research Lead Economist Raj Prabu Rajakulendran said the Government had been able to mobilise funds rapidly due to earlier fiscal discipline. He noted: “The State has accumulated cash surpluses and reserves over a long period, which now serve as buffers that can be deployed for emergency spending.”

He observed that the fiscal position allowed the Government to address urgent needs without seeking new financing.

Rajakulendran said: “December usually records an increase in inflation because of the festive season and a rise in remittances.” However, he explained that the pattern changed during crises. 

He noted that in December 2019 and December 2020, the Covid-19 period saw lower inflation than expected because people reduced their discretionary spending. “The current storm could result in similar behaviour if it continues for an extended period, which may limit the expected rise in December inflation.”

If conditions improve within the next few days, he expects an uptick due to seasonal activity, but not at the intensity usually associated with a strong festive period.

He stated that the economic impact depended on the duration of the crisis. If the storm continues to restrict mobility and business operations through December, the cost of living may rise differently across income groups. He noted that while inflation may not surge as it did in a normal year, households would feel pressure through lost income, increased spending on repairs, and delayed recovery of livelihoods.

Disruptions across the island

Across the country, small businesses are struggling to keep their premises open. Many are without power and transport. Daily-wage workers have lost income for several consecutive days. Shops in low-lying areas have closed due to flooding. Households in affected districts are rationing food and supplies while waiting for assistance. 

These realities, economists say, form the core of the economic shock rather than price indices alone.

Tourism, which has been one of the few bright spots of the recovery, is also facing uncertainty. The President has instructed the Sri Lanka Tourism Development Authority (SLTDA) to ensure that essential services are provided to foreign visitors who are stranded or affected by the storm. 

Airlines have issued travel advisories and some flights have been delayed due to weather. Any prolonged disruption during the final quarter risks affecting foreign exchange earnings that the country depends on during the winter season.

The Government is also considering whether to make an international appeal for emergency assistance. Pakistan has already conveyed its solidarity with Sri Lanka, reflecting early signs of international support.

The economic consequences that follow this storm will be shaped by how long the weather persists, how quickly infrastructure can be restored, and how effectively relief reaches the most affected households. 

Economists agree that the immediate priority is stabilising daily life and enabling people to return to work safely. The Government’s ability to deploy existing fiscal buffers provides some reassurance, but the risk of a slower recovery remains if industrial activity stalls or if agricultural losses widen.

For thousands of families now in temporary shelters, the most pressing concern is not inflation statistics or GDP forecasts. It is the safety of their homes, the stability of their incomes, and the uncertainty of a future shaped by rainfall that has not eased for days. Sri Lanka’s recovery has reached a delicate phase and this disaster has tested the country’s resilience once again.