The horror of Sri Lanka’s floods after Cyclone ‘Ditwah’ might make these among, if not the worst natural disasters. There is no question that this will be extremely impactful on the country’s economic story even outside of the terrible death toll which at present exceeds 300 with another 300 missing.
At this moment, the economic impact itself remains uncertain. The extent of property and infrastructure damage seems to be among the highest if not the highest after the tsunami. Beyond the most visible outcomes, the impacts of natural disasters have often been complex in the past – we think that such complex and sometimes counterintuitive outcomes remain possible. We would be wary of making and acting on strong claims one way or the other right now but be aware of very big moves that can even counter each other.
In the space of different things that can change, we’re keeping a track on a few questions that we’re outlining in summary below
How much will inflation rise? - While an immediate impact onto food prices is likely because of disrupted supply, whether this continues at the same rate if imported food (including the possibility of lower tariffs) comes through remains open. Movements in the currency and the energy mix will also come into play here.
How much of a consumption impact will this have? - Consumption falling across the affected areas is likely to be seen, but whether the combination of hoarding and donation related consumption counters this is a question for us. We have previously spoken of the unequal nature of Sri Lankan consumption, and the relatively unaffected Southwestern belt likely accounts for over half of national consumption. Whether this is enough to compensate reduction elsewhere is a question we’re keeping a track of.
How much foreign inflows will Sri Lanka see? - Donations and grants, including personal remittances, are likely to see an uptick. The question is whether this is significant enough to make a dent and whether this counters any immediate import requirements, and any potential falls in tourism. We’re also looking to see if multilateral partners will front-end any disbursements and whether they will repurpose existing project allocations towards supporting reconstruction.
How soon will recompensation and reconstruction expenditures start? – Immediate costs on both recurrent and capital spending is likely to be relatively small (less than 1% of GDP) as the focus remains on immediate recovery. More substantial expenditure allocations (1-2% of GDP) might be in the cards over the next 12 months, but the mechanism of actual expenditure might determine how much actually gets spent.
How much of an internal migration shift will result from this? – Past natural disasters have generally resulted in substantial internal migration shifts, especially as damaged economic prospects come into play. Given the widespread nature this time, we’re looking to see if such patterns come into play again, especially into the relatively unaffected South-Western belt.