Following Cyclone Ditwah, Sri Lanka’s ability to better manage climate financing has come under scrutiny. While the country launched a National Climate Finance Strategy (NCFS) 2025–2030 in late 2025, the cyclone has highlighted the need for rethinking existing approaches.

In an interview with an American news outlet following Ditwah, President Anura Kumara Dissanayake outlined Sri Lanka’s priorities moving forward, highlighting climate finance and its intersection with debt sustainability. 

In the interview, the President noted the need for climate finance, investments, and grants for early warning systems, resilient infrastructure, and coastal protection. As the post-default recovery increasingly intersects with climate impacts, he noted that international frameworks must evolve and highlighted the need to revisit debt sustainability frameworks for climate-vulnerable countries.

In light of this current situation, experts note the need to better incorporate climate finance, make more effective use of existing instruments and funds, and integrate climate risks into debt-related processes where possible.

Leveraging existing instruments and funds

Speaking to The Sunday Morning, Economist and Climate Frontiers Climate Change and Disaster Risk Management Specialist Rohan Cooray noted that Sri Lanka’s vulnerability to climate change should be used as a basis to revisit debt restructuring terms.

Explaining Sri Lanka’s previous stances on climate finance, he said that even prior to recent extreme weather events, the country had begun focusing on a climate financing strategy. Under the approved Climate Finance Strategy, 12 financing tools have been identified to support greener investments and strengthen the resilience of infrastructure and development sectors against both recurrent and extreme weather events.

The NCFS is a roadmap to attract investment for green projects, integrating climate action into national development by mobilising private capital beyond the budget, using innovative financial tools like green bonds, and fostering partnerships to finance renewable energy, sustainable agriculture, and resilience, aiming for a low-carbon economy and net-zero transition.

Cooray referred to a World Bank report published around 2018, which estimated Sri Lanka’s average annual economic loss from climate-related disasters at approximately $ 316 million, should an event occur, mainly driven by floods, landslides, cyclones, and high winds. At the time, this amounted to less than 1% of Gross Domestic Product (GDP).

Natural disasters currently cost the country 0.5–1% of GDP annually in direct terms, with total economic losses averaging 2.5% of GDP.

To manage such losses and improve liquidity during emergencies, Cooray noted that the Government had introduced the Catastrophe Deferred Drawdown Option (Cat-DDO) in 2014.

This facility can be activated if three conditions are met: a declared state of emergency, the presence of a disaster management policy, and a national emergency operation plan. Once triggered, the Government could access up to 0.25% of GDP – over $ 100 million – within 24 hours from the World Bank without further review. 

He pointed out that although such instruments existed, Sri Lanka had not consistently used them as part of a proactive fiscal strategy to reduce the economic impact of climate shocks.

Following Cyclone Ditwah, Cooray described the Government’s request for around $ 206 million through the International Monetary Fund’s (IMF) Rapid Financing Instrument (RFI) as a post-disaster response rather than a proactive strategy. He highlighted the importance of having proactive tools in place, including risk transfer and insurance mechanisms, which he noted should adopt the Build Back Better (BBB) concept. However in Sri Lanka, it is mainly about recovering the cost of repairing.

Cooray also noted the National Natural Disaster Insurance Scheme introduced in 2016, which he said was designed to protect citizens against disasters such as floods, landslides, cyclones, and storms. The scheme, fully subsidised by the Government and implemented through the National Insurance Trust Fund (NITF), excluded drought due to challenges in defining and triggering coverage. 

Cooray noted that around $ 380 million had been paid to establish the scheme, with support from 13 reinsurance companies. Shortly after its introduction, severe floods in May 2016 caused damages estimated at $ 688 million, based on post-disaster needs assessments. He explained that compensation had been covered through the insurance scheme, allowing the Government to avoid diverting development finance towards relief efforts. He described the scheme as a cushion that helped absorb immediate shocks.

He further noted that in 2017, when a major landslide had occurred, Sri Lanka had been able to draw on both the Cat-DDO and the insurance scheme, while also paying compensation to affected households.

“However, these repeated disaster claims led to higher reinsurance premiums after Sri Lanka was ranked among the world’s top 10 most climate-vulnerable countries between 2017 and 2019. Thus, premiums increased massively, which likely contributed to the scheme being discontinued later. But there are other approaches, such as parametric or index-based insurance, that could have been explored,” he added.

Incorporating financial resilience  

According to Cooray, climate finance is not easy to access and requires properly developed programmes which are investment-ready, climate-responsive, and contribute to greenhouse gas reduction, or are connected to development activities.

“So how can we use climate finance for debt restructuring? Sri Lanka has failed to integrate climate risks into its debt restructuring discussions,” he noted. He pointed out that Climate Resilient Debt Clauses (CRDC) could have been incorporated into debt sustainability assessments, which could have allowed for interest payment deferrals following major disasters based on the shock/total recovery cost. 

Following Ditwah, the World Bank estimates placed direct physical damage at around $ 4.1 billion, or roughly 4% of GDP, and total recovery costs could exceed 6% of GDP.

Cooray explained that Sri Lanka’s vulnerability to climate change should be used as a basis to revisit debt restructuring terms, especially with multilateral lenders, with debt restructuring linked to the country’s macro-economic framework.

“Disasters are unprecedented. With rising global warming, small countries are usually the victims of the problem, although not always the creators. We should utilise options such as the United Nations-backed Loss and Damage Fund, administered by the World Bank,” he added.

Thus, Cooray noted that if the country wished to revisit the IMF programme, this priority should be considered and financial resilience to climate change must be incorporated into all debt discussions.

He added that the Central Bank’s Sustainable Finance Roadmap and Green Finance Taxonomy now allowed better tracking of climate-related investments, enabling funds to be channelled towards mitigation, adaptation, and environmental conservation.

Cooray emphasised that climate resilience must be incorporated into all future debt discussions, lending frameworks, and programmes, adding that without such integration, repeated climate shocks would continue to undermine debt sustainability, financial stability, and economic recovery. 

“Proper implementation plans should be there for all these available strategies,” he added.

More prudent infrastructure to address disaster resilience

Meanwhile, Frontier Research Senior Research Analyst Navinda Meepe noted that funding allocated for Ditwah-related expenditures were not considered as a net outflow if spent.

“We do not necessarily consider the funding allocated for Ditwah-related expenditures as a net outflow if they do get spent. The thinking behind this is, some of these funds generate economic activity which is subsequently taxed indirectly, which could offset part of these expenditures. Also, revenue performance has been fairly significant and is showing strong momentum, and thus there may be scope to use this to help cover climate-related expenditure this year as well,” he explained.  

In addition, Meepe noted that some pay-downs in Treasury bills in 2025 provided a degree of fiscal leeway in terms of interest costs as well and could still limit the impact of significant debt growth on the fiscal side. 

In terms of external debt repayments, he explained that these were already being paid, and even for 2025, despite over $ 1 billion in vehicle imports, the country could achieve a current account surplus around $ 1.5 billion at the very least. According to him, this suggests that on the external front, dollar inflows to manage debt repayments could become even stronger with easing of the pent-up demand for vehicle imports.

“Additionally, some Ditwah-related foreign inflows came in December 2025, and further support from the multilaterals and IMF tranches in 2026 could help manage these repayments more effectively, whereas for most of 2025 inflows outside the IMF were significantly low. 

“Given all of that from an infrastructure perspective, the Government could therefore have some space to incorporate more prudent and resilient infrastructure to address disaster resilience, supported by a combination of domestic relief and easing foreign-side pressures using the Ditwah-related damage as an example,” Meepe added.

Better mobilised domestic financing sources

Insights published by interdisciplinary public policy think tank Centre for a Smart Future (CSF) following the cyclone also state that as is the case of many countries, Sri Lanka’s debt sustainability analysis does not systematically account for climate impacts.

Accordingly, the macro-linked bond structure ties debt service to GDP performance, and could in effect get adjusted once GDP is affected by the cyclone, but it does not explicitly include provisions for climate shocks that simultaneously damage growth and increase fiscal demands.

Addressing how climate finance can be structured or technically implemented so that it crowds out future debt accumulation, CSF Director Anushka Wijesinha noted that Sri Lanka must be circumspect and realistic about international climate finance. He added that the commitments made by global partners had not matched the reality of actual disbursements and funding flows.

“While continuing to seek international climate finance, we must also get better at mobilising domestic financing sources, from how we allocate budget money to how we leverage domestic private capital. Moreover, climate finance globally is heavily weighted towards mitigation finance, for example energy and transport. But for Sri Lanka, some of our largest needs are in adaptation finance, such as managing heat stress, climate-resilient infrastructure, conservation finance for biodiversity and nature, etc.,” he added.

Wijesinha explained that this funding was harder to access globally, but noted that new pathways were emerging, for which Sri Lanka must prepare the groundwork.

On key parameters that should be considered to better reflect recurrent climate disasters, he said that Sri Lanka must incorporate climate-resilient debt clauses into future sovereign debt contracts and foreign loans. “What the exact climate-related parameters should be can be collectively identified by experts, based on our climate vulnerabilities that have been well documented by our scientists,” he noted.