Sri Lanka’s hard-won economic recovery at risk from El Nino and Middle East war, says IMF

Sri Lanka, still grappling with its most severe economic crisis, faces a fresh threat from both the El Nino climate phenomenon and the ongoing Middle East war, warns the International Monetary Fund (IMF). The Asian nation's economic downfall in 2022 was sparked by a severe foreign exchange shortage, resulting in a historic sovereign debt default.

The IMF's review of the $2.9 billion (RM11.83 billion) bailout program emphasizes the importance of preserving the progress made since the 2022 crisis. "Sri Lanka continues to confront downside risks from uncertainty over the duration and intensity of the Middle East war, global trade policy, and the impact of El Nino," the IMF stated.

El Nino, a natural climate pattern characterized by warmer Pacific Ocean temperatures, can alter wind and rainfall patterns worldwide. Amplified by human-induced climate change, Sri Lanka's meteorological department predicts a combination of severe drought and heavy rainfall during the remaining months, threatening the agricultural economy. In response to the drought, the Sri Lankan air force recently flew Buddhist monks to pray and disperse holy water over affected areas.

A reduction in rainfall could lead to diminished hydroelectric power generation, potentially forcing the nation to rely on more costly thermal power generators. Since the US war with Iran commenced in February, Sri Lanka has witnessed a more than 50% increase in fuel prices. Despite previous plans to return to cost-recovery pricing, the government has pledged to continue subsidizing fuel in October.

The IMF has urged authorities to maintain unwavering commitment to prudent policies and reforms to rebuild fiscal and external buffers amid the volatile economic environment. The four-year IMF loan program is set to conclude in March, leaving open the possibility of a new agreement with the Washington-based institution.