• Growth may slow but not reverse, as reconstruction and relief spending offset short-term losses

Cyclone Ditwah struck Sri Lanka in late November, and it left a trail of destruction across the island with over 600 lives lost, around 10% of the population affected, and infrastructure, farmlands, and tea estates heavily damaged. 

With rebuilding costs estimated at up to $ 7 billion, the storm posed the country’s biggest test since its 2022 economic collapse. Yet, while the humanitarian cost has been grave, analysts now suggest that Ditwah may not fundamentally alter Sri Lanka’s growth trajectory.

Rebuilding amid recovery

According to official data from the Department of Census and Statistics, Sri Lanka’s economy expanded by 5.4% in the third quarter of 2025, lifting nine-month growth to 5%. Agriculture grew by 3.6%, industry by 8.1%, and services by 3.5%. 

The construction sector, a key driver of the current recovery, expanded by 12.2% during the quarter, signalling that activity had already picked up ahead of the storm.

These figures provide a strong base effect for the year’s final quarter, though the floods at the end of November are expected to shave some output. Officials estimate overall 2025 growth will end just below 5%, still well above earlier projections by international institutions. The Government expects growth to remain above 5% in 2026 as reconstruction spending injects new demand into the economy.

A senior Minister told Reuters that the Government projected the economy “to expand by more than 5% next year, matching this year’s pace and significantly outstripping International Monetary Fund (IMF) projections, partly driven by reconstruction efforts following Cyclone Ditwah”.

Global institutions take cautious note

The optimism in Sri Lanka contrasts with more cautious assessments from international agencies. 

IMF

The IMF, in its October 2025 outlook, had projected growth of 4.2% for both 2025 and 2026, urging the Government to maintain reform discipline under its ongoing Extended Fund Facility programme. 

IMF Deputy Director Thomas Helbling credited “very strong growth” driven by reforms but stressed that fiscal consolidation and State enterprise restructuring remained essential for sustained recovery.

World Bank

The World Bank, in its October Sri Lanka Development Update, placed 2025 growth at 4.6%, warning that the recovery was “uneven and incomplete,” with output still below 2018 levels and poverty about twice as high as before the crisis. It cited persistent inflation in food prices and a slow rebound in labour markets as key vulnerabilities.

ADB

By contrast, the Asian Development Bank’s (ADB) December Asian Development Outlook upgraded its forecasts following strong industrial and service sector performance. 

The ADB noted that “Sri Lanka’s growth prospects may be dampened by the impact of Cyclone Ditwah,” but maintained an optimistic tone, emphasising momentum in private credit expansion and investment. 

Fitch 

Fitch Ratings, meanwhile, has set its 2025 projection at 4.3%, while maintaining Sri Lanka’s sovereign rating at CCC+ given its high debt burden.

Moody’s

Momentum in Sri Lanka’s economic recovery continued in 2025, with real Gross Domestic Product (GDP) expanding by 4.8% year-on-year in the first half of the year, following growth of 5% in 2024, according to Moody’s. 

The ratings agency expects growth to slow to around 4.5% for the full year, as base effects are likely to contribute to some moderation in the second half of 2025.

A measured view from analysts

Verité Research Lead Economist Raj Prabu Rajakulendran drew parallels between Ditwah and earlier shocks such as the 2004 tsunami. “Even based on experiences of the tsunami, we didn’t see any negative growth. You could reasonably assume that even for Cyclone Ditwah, there wouldn’t be any negative growth,” he said.

He explained that the structure of GDP measurement often neutralised short-term economic losses through the offsetting effects of reconstruction activity. 

“The economy suffered a lot for maybe two weeks, but then other industries reactivated. There was a significant rebuilding effort that came in that sort of negated the two effects,” he noted, adding that the current 4.5–5% range would likely hold.

High-frequency indicators such as the Purchasing Managers’ Index (PMI), Rajakulendran suggested, would provide early signs of post-cyclone output trends across manufacturing and services. 

“Those indices come in quite fast and on a monthly basis. They tell you what is happening to industry and services, and that can indicate the upcoming story,” he said.

Balancing fiscal flexibility and debt

The cyclone’s fiscal implications, however, are unavoidable. Rajakulendran observed that while the IMF programme allowed flexibility for disaster-related spending, the Government was expected to breach the 13% primary expenditure limit this year due to approximately Rs. 500 billion in additional outlays.

“The IMF will likely be fine with it if we are able to explain and show where the spending is going,” he said, cautioning that financing strategy remained a critical concern. 

“We’re quite desperate to get financing. In that process, we might seem to be forgetting the cost of it. The Rapid Financing Instrument (RFI) that the IMF Board is approving is coming at a really high interest cost at around 6%.”

Rajakulendran stressed that the balance between financing needs and debt sustainability must be carefully managed, urging greater reliance on grants or domestic financing in order to reduce exposure to expensive borrowing.

Emergency support from int’l partners

External support has already begun to flow in. The IMF Executive Board approved Sri Lanka’s request for $ 200 million in emergency assistance under the RFI on Friday (19), following a formal request by the authorities earlier in the month.

The ADB, meanwhile, launched a $ 40 million emergency assistance facility under its Trade and Supply Chain Finance Program, in addition to the $ 200 million already allocated to Sri Lanka. 

“Cyclone Ditwah has severely disrupted access to vital goods, compounding existing challenges,” said ADB Country Director Takafumi Kadono, adding that the facility would ensure essential imports such as food, medicine, and relief supplies.

The World Bank also announced up to $ 120 million in emergency support by repurposing funds from ongoing projects to restore critical services and infrastructure in health, water, education, and agriculture. Its private sector arm, the International Finance Corporation (IFC), pledged further advisory and investment support to help Micro, Small, and Medium-sized Enterprises (MSMEs) rebuild.

The real cost: Poverty and inequality

While headline growth may hold steady, the underlying human cost of the disaster remains less visible. Rajakulendran pointed to poverty as the “actual indicator to look at”. Sri Lanka has not officially measured poverty since 2019, even though World Bank estimates suggest the rate has risen to nearly 30%.

“Even before the cyclone, poverty was around at least 28–30%. This can obviously worsen it, but we don’t know its impacts until we start measuring poverty seriously,” he said. 

The World Bank also highlighted that an additional 10% of the population lived just above the poverty line, making them highly vulnerable to shocks such as Ditwah.

The impact on rural livelihoods, particularly in the agricultural sector, may deepen inequalities even if GDP growth remains statistically resilient. As reconstruction creates demand in construction and services, the uneven recovery could widen regional disparities unless complemented by targeted support.

Growth, but uneven

For now, Sri Lanka’s short-term outlook remains underpinned by earlier momentum. 

The first three quarters of 2025 saw strong output growth in construction, manufacturing, tourism, and finance, offsetting weaker agricultural yields. Private sector credit has expanded, inflation remains subdued, and investor confidence has improved, supported by external inflows under the IMF programme.

The fourth quarter, however, will reflect the immediate impact of the cyclone on tea, agriculture, and transport. Analysts expect GDP growth to moderate slightly but stay close to 5% for 2025, in line with the projection of the Department of Census and Statistics.

In 2026, the picture could depend on how quickly reconstruction spending translates into productive investment. The ADB forecasts sustained expansion supported by infrastructure projects and improving business sentiment, while the IMF and World Bank both foresee moderation towards 3.5–4% as the economy stabilises.

As Rajakulendran noted: “We need money, but at what cost is it coming at? And what does it mean for Sri Lanka’s debt sustainability? That is a critical balance we need to maintain.”

Ditwah’s aftermath thus presents both a challenge and an opportunity, in the form of balancing relief spending with debt sustainability, while maintaining credibility under the IMF programme. The headline numbers may stay resilient, but the depth of the recovery and the resilience of its people will depend on how equitably that growth is shared.