In Focus - How our Fiscal and External views are likely to change after 'Ditwah'
With the government’s supplementary estimate for 2026 coming through and key spending items being finalized alongside external flows, we can provide a clearer picture of the direct fiscal and external costs of Cyclone Ditwah. While estimates of the damage itself will likely be in the multi-billion dollar range, the actual costs in 2025 and 2026 will inevitably be lower than the full damage.
In this focus, we’re going though some of our thinking on how fiscal and external costs will come through. We are likely to further narrow these in early 2026 once detailed impact assessments are out.
We think the fiscal costs are easily managed - and will still result in major overperformance
The government’s estimate for the total new spending in 2026 account to LKR 500 bn, with most of this being new capital spending on reconstruction. We think a majority of this gets spent, although perhaps not the entire amount.
Both the government and the IMF seem to be expecting that revenue will continue to slow down in 2026 from 2025. One thing to note here is that, given that most of the relief spending is likely to be in the first half of the year, and Sri Lanka’s historically high ‘speed of money’, a meaningful share of this spending should cycle back into government revenues within 2026 itself. Funds directed towards rebuilding will flow through as investment, while relief spending will support consumption. In both cases, this spending moves through the economy and is gradually recaptured by the government in the form of taxes. For us, this means that the fiscal balances may remain very strong even after the impacts of the cyclone are accounted for.
The external sector is likely to be stronger than previously expected
Before the cyclone, we expected strong positive pressure on the external sector to come in from December itself, and be more clearly visible moving into the middle of 2026. While the timeline for this has changed somewhat due to the impact of the cyclone, we do think strong external pressure will be visible in 2026 - on the back of a stronger current account and much better net debt inflows.
In any case, we think the structural improvements that were anyway likely in the current account will more than offset any increased import needs. Vehicle imports would have anyway slowed down, net port services would have continued to rise with new capacity coming on line, oil imports would be either flat or slightly lower on both global price movements and local energy mix changes, and remittances would have continued a slow rise.