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

Sri Lanka's central bank has cautioned that worsening weather conditions, linked to the El Nino climate phenomenon, could impede the country's fragile economic recovery. The Central Bank of Sri Lanka highlighted that the nation's worst-ever El Nino conditions, coupled with last year's devastating Cyclone Ditiwah, which caused thousands of fatalities and immense damage, could exacerbate risks for lenders as the island nation emerges from its 2022 sovereign default.

The report, published by the central bank, noted that climate-related risks, such as El Nino and heightened financial market volatility, have created a challenging external environment. This could potentially impact domestic macroeconomic and financial stability, posing risks to banks through rising loan defaults and deteriorating credit quality.

The World Bank estimates infrastructure losses from the cyclone at approximately US$4.1 billion, while the government has allocated US$1.6 billion for a recovery program. Sri Lanka has been grappling with an unprecedented economic crisis that culminated in its first sovereign default in April 2022, following a depletion of foreign exchange reserves to fund essential imports.

This economic meltdown triggered widespread food, fuel, and medicine shortages, leading to months of protests that ultimately forced President Gotabaya Rajapaksa to resign.

Despite securing a US$2.9 billion International Monetary Fund (IMF) bailout in March 2023 and restructuring its foreign debt, Colombo has experienced a return to growth. However, the central bank warned that the current El Nino episode, described as the worst the country has faced, could impose additional burdens on households, businesses, and financial institutions.