COLOMBO — Sri Lanka’s nascent and fragile recovery from its worst economic crisis in modern history faces severe disruption from what could be the most intense El Niño cycle on record, the island nation’s central bank warned in a policy report released on Monday night.
The Central Bank of Sri Lanka (CBSL) cautioned that mounting climate-induced vulnerabilities—chief among them the severe El Niño weather pattern—alongside turbulence in international financial markets, present formidable global headwinds that could undermine macroeconomic equilibrium and systemic financial stability.
The warning follows the trail of destruction left by Cyclone Ditwah last year, which claimed approximately 650 lives and inflicted structural damage estimated by the World Bank at $4.1 billion. While the Sri Lankan government has mobilized a $1.6 billion recovery and reconstruction framework, the disaster has depressed domestic asset valuations and elevated non-performing loan (NPL) risks across the banking and non-banking financial sectors.
Sri Lanka previously plunged into economic collapse in April 2022 after foreign exchange reserves evaporated, leaving the country unable to import essential food, fuel, and medical supplies, precipitating its first-ever sovereign debt default. The ensuing public outrage forced then-President Gotabaya Rajapaksa to resign. Following a $2.9 billion Extended Fund Facility (EFF) approved by the International Monetary Fund (IMF) in March 2023, coupled with comprehensive external debt restructuring, the economy had begun tracking toward pre-crisis stability benchmarks.
However, those hard-won economic gains now confront acute climate risks. The Department of Meteorology has forecast torrential downpours extending through December, to be followed by prolonged, severe drought conditions across the first half of next year. Meteorologists have characterized the unfolding El Niño as the most destructive in Sri Lanka’s recorded history.
The central bank emphasized that worsening weather shocks will place acute liquidity and balance-sheet strains on households and businesses. A wave of debt servicing failures would degrade asset quality across the commercial banking system, threatening broader systemic stability.
El Niño, driven by the cyclical warming of sea surface temperatures across the central and eastern Pacific Ocean, fundamentally alters global atmospheric circulation and precipitation patterns. Climate scientists caution that anthropogenic global heating is amplifying these phenomena, trapping excess heat and atmospheric moisture to produce unprecedented weather extremes.
Sources: Central Bank of Sri Lanka (CBSL), Agence France-Presse (AFP), and World Bank Disaster Assessment Reports.