Not a moment to lose: Why Sri Lanka must mobilise its monetary and fiscal capacity

SRI Lanka is confronting a moment of profound national crisis.

- By Charith Gunawardena, Fadhel Kaboub and Richard Tye

The devastation caused by Cyclone Ditwah, marked by widespread flooding, landslides, and the displacement of more than a million people, has collided with the pressures of a sovereign debt crisis and a fragile post-default recovery. As in many countries facing climate-induced disasters, the scale of the emergency has reignited debate about what a Government can afford to do, how it should pay for it, and whether existing economic rules should constrain the national response.These questions are not merely technical but cut to the heart of what it means for a State to protect its people.

From a Global South perspective, this moment is painfully familiar. Climate disasters are increasingly colliding with externally imposed fiscal constraints, debt conditionalities, and orthodox policy doctrines that treat public spending as a risk rather than a responsibility. The result is a dangerous policy paralysis at precisely the moment when decisive State action is most needed.

Sri Lanka's crisis is therefore not only national but reflects a broader structural failure in the international economic order that systematically constrains climate-vulnerable, import-dependent countries when they most need policy space.

Sri Lanka can finance emergency spending

A central truth is often forgotten in public debates. A Government that issues its own currency, as Sri Lanka does with the rupee, is never financially constrained in the same way that a household, firm, or local Government is. It can always make payments in its own currency. The real limits are not monetary, but physical such as the country’s labour force, construction materials, transport networks, agricultural capacity, energy system, and critically for Sri Lanka, its access to foreign exchange for essential imports.