Cyclone Ditwah estimated to cost economy up to Rs.320bn as national balance sheet takes a hit

Sri Lanka faces a potential economic loss ranging between Rs.210 billion and Rs.320 billion, following the devastation of Cyclone Ditwah, with the experts warning the event represents a major shock to the national balance sheet rather than a localised natural disaster. 
The cyclone has impacted nearly all districts that collectively generate approximately 82 percent to 84 percent of the national gross domestic product (GDP), disrupting critical economic corridors from the Western province to agricultural heartlands.
Economist and Lanka Rating Agency Ltd Chief Executive Officer Dr. Kenneth De Zilwa characterises the disaster as a “national balance-sheet shock”, noting that the banking sector assets reflect the liabilities of the real economy. 
According to his initial cursory assessment, the total estimated loss accounts for 0.75 percent to 1.0 percent of GDP. The breakdown of these losses projects a Rs.70 billion to Rs.110 billion hit to production, Rs.55 billion to Rs.75 billion in infrastructure damage and Rs.35 billion to Rs.50 billion in agricultural losses. Furthermore, household and small and medium enterprise (SME) assets are estimated to have suffered damages totalling between Rs.50 billion and Rs.85 billion. 
The economic fallout is expected to be broad-based, as the Western province, which accounts for nearly 40 percent of GDP and serves as the hub for industry, logistics and finance, has been significantly affected. 
Asia Securities Research notes that the near-term GDP growth would be hampered by these disruptions, specifically pointing to the severed road and rail corridors that are impeding the cargo flows and inflating the delivery costs. The research firm highlights that the export receipts are likely to see a decline, particularly from agriculture and tourism, further affecting the foreign exchange inflows.
The agricultural output faces severe constraints, with the crops destroyed in the key tea-growing districts and cultivation cycles disrupted. Asia Securities warns that this erosion of productivity and long-term soil fertility deterioration could lead to supply constraints, triggering an inflationary risk on the food prices. 
Dr. De Zilwa echoes this concern, identifying the food supply disruption and the subsequent risk of food price inflation as a primary macro risk. He further notes that the country may face increased import costs for consumer items and reconstruction materials, placing pressure on the exchange rate and potentially driving fiscal strain.
The industrial and manufacturing sectors are grappling with the temporary factory shutdowns and disrupted production schedules caused by the widespread flooding and power outages. The energy-intensive industries are expected to face disproportionate stress, due to higher fuel procurement expenses and transport costs. 
Dr. De Zilwa points out that the disaster highlights a deeper structural issue, where Sri Lanka continues to rely on food imports and external funding based on the outdated economic thinking. He argues that climate shocks now demand a modern balance-sheet approach aligned with national focus, moving away from the vulnerable, outdated flood systems.
The financial sector is also bracing for impact. The insurance companies are expected to face negative pressure in the short to medium term, due to a surge in flood-related motor and property damage claims. Simultaneously, both Asia Securities and Dr. De Zilwa forecast the rising credit risks for the banking sector. There is an anticipated uptick in non-performing loans, particularly from the facilities granted to the SMEs that are facing repayment pressures, due to the disaster.
Despite the overwhelming headwinds, there are pockets of economic activity expected to rebound. The construction sector and related material segments are projected to see a positive impact in the medium term as reconstruction efforts commence. 
However, Dr. De Zilwa emphasised that the recovery must go beyond immediate repair. He advocated for an “Industrialisation 6.0” approach with resilient, tech-driven capital formation, suggesting that Sri Lanka must rebuild smarter and stronger to reduce future climate vulnerability. (NF)