IMF says inflation to exceed 5% CBSL limit; BOP deficit to widen by $ 700 m

SRI Lanka faces an economic setback from Cyclone Ditwah that could wipe out between 2.5% and 5% of GDP, widen the balance of payments (BOP) gap by about $ 700 million over the next year, and push inflation higher and over Central Bank of Sri Lanka's (CBSL) 5% limit in 2026.

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This is according to an International Monetary Fund (IMF) staff assessment released last week which noted that the cyclone's impact is expected to be significant, though subject to a high degree of uncertainty, noting that estimates of losses and macroeconomic outcomes carry wide margins of error.

Based on experience from past disasters of similar magnitude, staff said the losses would stem from reconstruction of housing, roads, and infrastructure, as well as relief spending, with the burden falling disproportionately on already vulnerable households.

Damage from Ditwah was assessed as more severe than the floods of 2016 and 2017, when recovery needs amounted to 1.1% and 0.8% of GDP, respectively.

The assessment indicates that economic growth could slow to 2.9% year-on-year (YoY) in 2026, from an estimated 4.2% in 2025, as the cyclone disrupts activity across key sectors.