Cyclone Ditwah to trim GDP growth by 0.5%-0.7%: FCR

• Headline inflation projected to rise by approximately 40 basis points
• Revises 2025 tourism earnings forecast down to US $ 3.2bn, from US $ 3.3bn
• Worker remittances expected to spike by 10-15%

By Nishel Fernando

Cyclone Ditwah, which struck Sri Lanka in late November, causing widespread flooding and landslides, is projected to shave off approximately 0.5 percent to 0.7 percent from the country’s real GDP growth, according to a flash note released by First Capital Research (FCR). 

The assessment draws on the historical precedents such as the 2016 floods and 2004 tsunami, suggesting that the disruptions to consumption, investment and net exports will outweigh the temporary economic activity generated by the government’s relief spending. Despite the immediate setback, FCR maintains its growth estimate of 3.0 percent to 4.0 percent for 2026.

The adverse weather conditions are expected to weigh heavily on private consumption, which accounts for roughly 68 percent of the island’s GDP. The reduced agricultural output, income losses among the rural households and damage to the small and medium enterprises are likely to dampen the consumer demand. While the government expenditure is anticipated to rise moderately, due to the emergency relief and infrastructure repairs, analysts warn this will be insufficient to fully offset the weaker private demand. Investment activity is also predicted to weaken as private-sector operations face disruptions.

Inflationary pressure is expected to intensify in the short term, with headline inflation projected to rise by approximately 40 basis points. Severe flooding has disrupted harvesting, storage and transportation, leading to supply shortages in key food categories such as vegetables, coconuts and fruits. Consequently, the annual average inflation estimate for 2026 has been adjusted upward to 3.3 percent, from the previous forecast of 2.9 percent.

The external sector faces a mixed outlook. Tourism, a vital foreign exchange earner, is facing a short-term setback during the early peak season, due to the inundation of Colombo and damage to the coastal hotel clusters. FCR has revised its 2025 tourism earnings forecast down to US $ 3.2 billion, from US $ 3.3 billion, though the 2026 outlook remains intact at US $ 3.7 billion. Conversely, worker remittances are expected to spike by 10-15 percent over the next six months, as the expatriates send funds to support the affected families, potentially reaching US $ 8.8 billion in 2026.

On the fiscal front, the disaster is expected to widen the fiscal deficit by roughly 0.1 percent of GDP, due to the increased spending on emergency relief and rehabilitation. The government has already allocated Rs.30 billion in Budget 2025 for disaster-related needs. Despite the strain, FCR expects the currency depreciation pressure to remain around 5.0 percent for 2026, as post-disaster import demand is largely balanced by the remittances and donor inflows.