Sri Lanka’s central bank warns El Nino could hit economic recovery

Sri Lanka's central bank has expressed concerns that the country's fragile economic recovery, following its worst economic crisis in decades, could be further undermined by worsening weather conditions linked to the current El Nino phenomenon. The Central Bank of Sri Lanka warns that this natural climate pattern, causing warmer ocean temperatures in the Pacific, can disrupt global wind and rainfall patterns.

This latest El Nino episode is described as the worst experienced by the island nation. The bank also cites the impact of last year's devastating Cyclone Ditra, which killed approximately 650 people and caused billions in damage, as having weakened asset values and increased risks for lenders. The Central Bank of Sri Lanka, in a recent report, highlights that climate-related risks, including El Nino, and heightened volatility in financial markets have created a challenging external environment.

This environment could potentially affect domestic macroeconomic and financial stability. The World Bank estimates that Cyclone Ditra caused around US$4.1 billion in infrastructure losses, while the government has launched a US$1.6 billion recovery program. Sri Lanka is still recovering from an unprecedented economic meltdown that began in April 2022, culminating in the country's first sovereign default due to a lack of foreign exchange for essential imports.

The crisis led to widespread shortages of food, fuel, and medicines, triggering months of protests that forced then-President Gotabaya Rajapaksa from office. Following the receipt of a US$2.9 billion International Monetary Fund (IMF) bailout in March 2023, Sri Lanka's economy has since returned to growth levels comparable to pre-crisis times.

However, the central bank warns that the worsening weather conditions associated with El Nino could create additional strains on households, businesses, and consequently, banks through rising loan defaults.