Cyclone relief pushes Sri Lanka’s deficit higher, raising debt concerns

Sri Lanka’s fiscal position has weakened sharply following Parliament’s approval of a Rs. 500 billion supplementary allocation to fund post-Cyclone Ditwah recovery, pushing the 2026 budget deficit to 6.5% of GDP, up from the previous estimate of 5.1%, according to a Finance Ministry report released last week.

The report, published under the Public Financial Management Act, also revised the primary surplus forecast for 2026 down to 1% of GDP from the earlier 2.5%, marking a sharp decline from the 3.8% surplus recorded in 2025. 

Total expenditure for 2026 is now projected at 21.9% of GDP, up from 20.5%, while total revenue and grants remain largely unchanged at 15.4% of GDP.

Capital spending saw the largest adjustment, rising to 5% of GDP from the original 4%, reflecting the urgent need to support reconstruction and disaster relief. 

Recurrent expenditure was slightly raised to 16.9% of GDP.

Finance Minister and President Anura Kumara Dissanayake said the additional spending will be met through existing government cash reserves, which stood at nearly Rs. 2 trillion, and that the borrowing ceiling of Rs. 3.74 trillion remains unchanged. 

The Finance Ministry emphasized that medium-term fiscal consolidation is projected, with the deficit expected to narrow to 3.8% of GDP by 2030 and the primary surplus recovering to 2.6%.

The International Monetary Fund (IMF), which recently approved a $206 million Rapid Financing Instrument for Sri Lanka, cautioned that debt sustainability risks remain high. 

The IMF stressed that emergency spending and reconstruction must be efficiently targeted and that fiscal discipline is essential to preserve debt sustainability while supporting economic recovery.

The IMF plans to send a team in early 2026 to re-evaluate the Fifth Review under the ongoing Extended Fund Facility program, which could release a tranche of $347 million. 

Before Cyclone Ditwah, Sri Lanka had made steady fiscal gains, though international estimates place the total economic impact of the disaster between $4.1 billion and $15 billion, including a projected $700 million balance of payments deficit in 2026.

The Finance Ministry report emphasized that Sri Lanka remains committed to its reform agenda, including restoring fiscal and debt sustainability, protecting vulnerable populations, maintaining financial stability, rebuilding external buffers, and advancing growth-oriented structural reforms.