Cyclone Ditwah’s GDP impact likely short-lived as reconstruction drives recovery, IMF says

Sri Lanka
By Editor_1
An aerial view of submerged buildings in a flooded area caused by heavy rainfall following Cyclone Ditwah in Niyamgamdora, Sri Lanka, December 2, 2025 -Akila Jayawardena/Reuters/File

COLOMBO – Sri Lanka’s economic growth in 2026 is expected to suffer a short-term setback from the devastation caused by Cyclone Ditwah, but much of the shock to gross domestic product (GDP) is likely to be offset by reconstruction activity and a faster-than-expected normalization of economic operations, officials and International Monetary Fund (IMF) representatives said.

IMF Mission Chief Evan Papageorgiou said preliminary assessments suggest that any loss of output may be largely confined to the first quarter of 2026, though a clearer picture will emerge only after more data becomes available.

“This is something we have to examine very carefully, particularly in terms of how the response unfolds,” Papageorgiou told reporters. “Our preliminary estimate, and I stress that it is preliminary,  is that growth will likely take a hit in the short term. That could mean one quarter, or possibly even less.”

He cautioned, however, against equating GDP growth figures with the true scale of economic damage. “Economic losses are going to be very important and sizable,” he said, noting that GDP calculations do not account for the destruction of capital stock.

To assess the pace of recovery, the IMF will closely monitor high-frequency indicators such as electricity generation, tourism arrivals, and trade activity. Initial signs point to a gradual rebound, with most roads already reopened and economic activity resuming in many affected areas.

Cyclone Ditwah brought large parts of the country to a standstill, displacing nearly two million people and destroying stocks in shops across inundated towns. Domestic tourism came to a halt and agricultural production suffered major losses, including damage to an estimated 108,000 hectares of paddy land, much of which officials say can be replanted.

Deputy Minister of Economic Development Nishantha Jayaweera said it was still too early to quantify the impact on tax revenues, though excise collections appear to have softened, partly because several distilleries were submerged during the floods.

Deputy Minister of Finance and Planning Anil Jayantha Fernando said the absence of reliable, comprehensive data made it difficult to estimate the full output loss at this stage. “The economic loss will depend on how quickly the economy comes back,” he said. “If activity resumes quickly, the loss will be less.”

The government has already announced a series of compensation and support measures aimed at restoring agriculture, animal husbandry, and small and medium-sized industries. A detailed damage assessment by the World Bank is expected soon, which officials say will provide more robust estimates of losses to infrastructure, businesses, and households.

Reconstruction spending, while not reversing the destruction caused by the cyclone, is expected to provide a significant boost to GDP during the rebuilding phase. Minister Fernando noted that rebuilding activity would add to measured output, likening it to the well-known “broken window” parable described by French economist Jean-Baptiste Say, in which repair activity generates economic transactions even though lost capital is merely being replaced.

“Reconstruction will add to growth,” he said, adding that the government intends to rebuild with stronger, more resilient infrastructure. Plans include slope strengthening for roads, relocating communities from landslide-prone areas, and ensuring that compensation leads to better-quality housing for vulnerable families.

Papageorgiou echoed this view, noting that construction activity could provide meaningful support to growth. “Given the scale of the damage, reconstruction is likely to add considerably to GDP,” he said. “But that does not mean the country has not suffered a severe economic shock.”

The IMF also warned of near-term macroeconomic pressures. Supply disruptions and shortages of certain food items could push inflation higher in the short term, while reconstruction-related imports are expected to widen the current account deficit over the next six to twelve months. Lower agricultural exports and potentially reduced tourism earnings could add to external pressures.

Sri Lanka is planning to increase government spending by around Rs 500 billion in 2026 to support relief, rehabilitation, and rebuilding efforts. President Anura Kumara Dissanayake has said the government aims to raise about US$500 million in external financing, in addition to the US$200 million already disbursed by the IMF under its Rapid Finance Instrument.

While analysts continue to debate the broader monetary and fiscal implications of the post-cyclone response, officials maintain that a swift recovery of economic activity, combined with well-targeted reconstruction, could limit long-term damage and even lay the groundwork for more resilient growth.

“The challenge,” Papageorgiou said, “is to rebuild better and faster, while managing inflation, external balances, and financial stability during a very delicate phase of Sri Lanka’s recovery.”

-ENCL/EN

Editor_1
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