Recently, Sri Lanka faced its worst natural disaster in decades with cyclone Ditwah in late last month (November 2025), causing massive floods and landslides that killed over 618 people, displaced 233,000, and destroyed 565 plus homes across 25 Districts, especially in Central Kandy and Badulla. The Kelani River flooding disrupted Colombo's roads, bridges, and power, straining emergency services and prompting aid from India, the US, Pakistan, Australia, Nepal, the Maldives, and China, plus a Presidential state of emergency. This highlights Sri Lanka's climate vulnerability, echoing past floods' toll on small and medium enterprises (SMEs). Natural disasters deter foreign direct investment (FDI) through risks, infrastructure damage, and economic uncertainty, though recovery aid can attract inflows. Stable macroeconomic policies historically drive Sri Lanka's FDI, but, Ditwah may delay investor confidence amid challenges. Targeted incentives post-disaster could channel FDI into resilient sectors like tourism and apparel. Cottage, Micro, SMEs (CMSMEs), key to the economy, suffer sales drops, shutdowns, and asset losses without preparedness; FDI could aid revival via technology transfers and supply chain rebuilding.

Effects of recent natural disaster on the people and economy in SL

Ditwah, striking Sri Lanka in late November 2025, killed over 635, displaced 233,000, and affected 10% of its 22 million people, inundating one-fifth of the country. It destroyed 565 plus homes across 25 Districts, with landslides and floods isolating tea areas like Kandy, Badulla, and Nuwara Eliya — still reeling from 2022's crisis that doubled poverty to 25%. Reconstruction costs may hit Dollars ($) six-seven billion (3.5% gross domestic product [GDP]), slashing next year’s (2026) growth by 0.5-0.7 points to ~3%, due to wrecked infrastructure, a 35% tea output drop, rice losses, and disruptions in the $ five billion apparel and $ 1.5 billion tea sectors (employing over one million). Tourism may fall to $ 3.2 billion in 2025 from the $ 3.3 billion projected; remittances rise 10-15% temporarily, but fiscal deficits widen 0.1% of the GDP from Rs. 30 billion emergency spending, with inflation spiking 40 basis points from supply shocks.

Criteria that foreign investors evaluate before entering a foreign mkt.

Foreign investors evaluate key indices for market entry: ease of doing business (regulatory efficiency for startups, contracts, trade), logistics performance (Customs, infrastructure, timeliness), global competitiveness (institutions, stability, innovation), networked readiness, information and communications technology (ICT) development (digital access/skills), global connectedness (trade/capital/people flows), and digital globalisation (digital trade/data). These metrics gauge supply chain reliability, the productivity potential, tech readiness, and interconnectedness vital for FDI decisions.

Data on criteria in SL for FDIs

Sri Lanka's performance in key investor indices reveals challenges amid recovery and Ditwah. Ease of doing business (now B-Ready): 99th/190 (2019), targeting 50% improvement via regulatory/digital reforms. Logistics Performance Index: 73rd/160 (2023), hampered by Customs delays and flood-exposed infrastructure. Global competitiveness: 70-80th (pre-2020), lagging in innovation, institutions, infrastructure. Networked readiness: 70th/132 (2023). ICT Development Index: 0.58 (~85th), signaling moderate digital access/skills needing post-disaster boosts. Global connectedness (~50th) and digital globalisation show low resilient trade/data flows.

Comparison of FDI investment criteria in SL with other South Asian nations

Sri Lanka lags in South Asian investment indices, with structural issues worsened by Ditwah. Ease of doing business (2019): 99th/190, trailing India (63rd), Pakistan (108th, improving), Bangladesh (168th, rising), Nepal (94th), Bhutan (89th), and the Maldives (147th); regional average 56.3. Global competitiveness (pre-2020): 70-80th versus India's 68th, and Pakistan's 110th. Logistics: 73rd vs. India's 38th, and Bangladesh 100th. Networked readiness: 70th; ICT development ~85th (behind India's top-50 digital gains); and global connectedness/digital globalisation ~50th, less integrated than peers.

Current Stats of CMSMEs in SL

CMSMEs form Sri Lanka's economic backbone, comprising 75-80% of firms, employing 45% of the workforce (4.5 plus million), and contributing 52% to the GDP, mainly in informal agriculture, engineering, services, and retail. The 2022 crisis and Covid-19 slashed small businesses 41% (82.1000 to 48.4000, 2019-2020) and medium halved to 6.1000; partial rebound to 80.8000 small/7.5000 medium by 2022, but employment fell from 485.5000 (2018) to 262.4000 (2020). Challenges persist: 45% failure rates (30% in the first two years), finance gaps, informal debt traps, low tech adoption; Ditwah disrupted supply chains/assets, though Government credit guarantees and SME forums build resilience.

The proposals for Budgets through the 2025 Appropriation Bills brought by the Govt. to support CMSMEs in SL and the fulfillment of proposals

Sri Lanka's 2025 Appropriation Bill, under President Anura Kumara Dissanayake, targets CMSMEs to reach 60% GDP contribution and 55% employment via enhanced finance and digitalisation. Allocations include Rs. 1,000 million for CMSME research commercialisation, a Development Bank with a National Credit Guarantee Institution, and the National Enterprise Development Authority (NEDA)/Industrial Development Board (IDB) consolidation for better support. Additional measures: technical aid for quality testing/certifications, public-private partnerships (PPPs) for global value chains, and the Sri Lanka-Unique Digital Identity (ID) (UDI) project to cut red tape. Mid-2025 progress: National SME Forum launched global linkages and initial credit guarantees; 20-30% digital incentive uptake. Ditwah disruptions and fiscal constraints delay State-owned enterprises (SOEs)/PPP Bills, needing faster rollout for 4-5% growth targets.

Budget proposal in the 2026 Budget to promote CMSMEs in SL

Sri Lanka's 2026 Budget, under President Dissanayake, targets CMSMEs through financing, reforms, and digitalisation to aid recovery. Key allocations: Rs. 5.9 billion for SME loan schemes to ease credit access; Rs. 240 million for self-employment and women entrepreneurs; Rs. 1,000 million (plus existing Rs. 4,000 million) for IDB-managed industrial zones; and Rs. 800 million for the Sustainable Agricultural Loan Fund supporting rural CMSMEs. It consolidates the IDB, the NEDA, and SME Development (SMED) under the IDB; lowers the tax incentive threshold from $ three million to $ 250,000; and allocates Rs. 3 billion for auxiliary service zones. Digital measures include free quick response (QR) code payments under Rs. 5,000, single-window approvals, electronic-procurement; women related programs and decentralisation align with the Digital ID rollout by March 2026.

Challenges that face the Govt. given the current disastrous situation  

Sri Lanka's Government faces hurdles attracting FDI amid instability, complicating 2026 Budget CMSME support. Declining FDI inflows strain Rs. 5.9 billion SME loans and institutional reforms like IDB consolidation. Frequent policy shifts and Government changes erode investor confidence, stalling large projects. Bureaucratic red tape, corruption, and abrupt tax changes deter funding for digital tools like QR payments and e-procurement. High debt, Rupee depreciation, and inflation raise costs, making Sri Lanka less competitive than Vietnam or India. Infrastructure gaps in power, logistics, and skills hinder CMSME global supply chain integration and Rs. 3 billion auxiliary zones. Regional rivals with better incentives divert FDI, challenging women entrepreneur programs (Rs. 240 million).

Some strategies to support CMSMEs as planned under the current situation 

To ensure that such targeted efforts are made to increase FDI and meet the plans of the 2026 Budget for CMSMEs development in Sri Lanka despite the challenges that it is currently experiencing in terms of its economy and politics, so that by the end of the year the country is able to meet the targets of $ one billion annually for International Monetary Fund (IMF) services export growth as requested by the IMF. To achieve such objectives, the following strategies should be adopted: streamline approvals through a single window at the Board of Investment (BOI) of any company for quicker decision-making for FDI investment by cutting the time spent by investors for approvals that often makes them reluctant to proceed with their plans of developing CMSMEs with tax holidays and lowered FDI project threshold levels (from $ three million to $ 250,000) that is in line with the IDB Consolidation of Rs. 5.9 billion for SME loans. Earmark FDI for export through services and manufacturing industries that meet $ one billion annual IMF services export growth targets. Establish auxiliary service zones with an allocation of Rs. three billion that would enable CMSMEs to link with FDI chains by utilising digital means such as QR-based payments systems or e-procurement systems. Develop power, logistics, and human resource development capacities that would ensure that infrastructure is developed despite FDI challenges by adapting best practices from Vietnam that developed FDI of $ one billion in Association of Southeast Asian Nations (ASEAN) markets. Encourage joint ventures that would require FDI enterprises to purchase 30-40% of their total procurements of raw materials or goods through CMSMEs that would develop women entrepreneurship development schemes (Rs. 240 million). Undertake aggressive marketing of FDI through the BOI that would aggressively advertise to Singaporeans, Chinese, among other nations that took FDI of 90% for the first quarter in 2025 amounting to $ 203 million by meeting such challenges through the direct negotiation of mega projects with CMSMEs' subcontracting that is being taken in India. Develop clarity among investors through effective debt restructuring for the prompt repayment of FDI through entrepreneurship development schemes (Rs. 240 million). 

The writer is attached to the Colombo University’s Management and Finance Faculty’s Management and Organisation Studies Department

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The views and opinions expressed in this column are those of the author, and do not necessarily reflect those of this publication