## Executive Summary — Cyclone Ditwah impact and RFI request

## Source details

**Canonical URL:** [Executive Summary — Cyclone Ditwah impact and RFI request](https://www.imf.org/-/media/files/publications/cr/2025/english/1lkaea2025003-source-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2025/english/1lkaea2025003-source-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2025/english/1lkaea2025003-source-pdf.pdf.json)

---

### Context
- Cyclone Ditwah struck on November 28, claiming more than 600 lives as of December 6 and affecting millions more.
- Severe flooding and landslides displaced over 100,000 people and destroyed houses, roads, bridges, rail lines, buildings including schools and hospitals, and hundreds of thousands of acres of agricultural land.
- More than 1.5 million people face moderate or high food insecurity; 23 percent of the population already lived below the poverty line and a further 10 percent is now at heightened risk.
- The disaster creates urgent humanitarian and reconstruction needs and acute balance-of-payments (BOP) pressures, at a time when Sri Lanka is emerging from a deep economic crisis and the IMF-supported reform program under the Extended Fund Facility (EFF) is beginning to bear fruit.
- Authorities requested support under the Rapid Financing Instrument (RFI) of SDR150.5 million (26 percent of quota, about US$205 million, 0.2 percent of GDP). The full amount will be available immediately for budget support upon Board approval.

### Economic impact of the cyclone
- Economic losses:
  - Previous similar natural disasters resulted in economic losses of 2.5-5 percent of GDP.
  - Recovery needs for the 2016 and 2017 floods were 1.1 and 0.8 percent of GDP, respectively.
  - Damage from Cyclone Ditwah appears more severe than the 2016-17 floods.
- Growth:
  - IMF staff’s preliminary assessment indicates growth could slow to 2.9 percent y/y in 2026, from 4.2 percent in 2025.
  - Agriculture and tourism (together accounting for 11 percent of GDP) are likely to be the hardest-hit sectors; construction activity is likely to support growth during rebuilding.
- Prices:
  - December 2025 inflation is projected to increase to 4.0 percent y/y from 2.1 percent y/y in November.
  - 2026 average inflation is expected to increase to 5.4 percent y/y from 3.3 percent y/y forecast at the Fourth Review.
  - Selected food items saw price surges of 30-200 percent due to shortages.
- Balance of payments:
  - Preliminary assessment indicates the current account deficit could widen by about US$700 million (0.7 percent of GDP) in the next 12 months.
  - Past 2016-17 disasters increased food and oil imports by 0.2 and 1.0 percent of GDP, respectively; higher remittances partially offset pressures.

### Outlook and risks
- Near-term:
  - Macroeconomic stability had been restored prior to the cyclone; gross reserves had increased to three months of imports and inflation had been low.
  - Growth is expected to return to potential at 3.1 percent in 2027, with inflation returning to target.
- Risks:
  - High uncertainty with downside tilt.
  - Risks include heightened external and debt sustainability pressures, possible reimposition of a higher tariff by the US lowering exports and growth, prolonged trade policy uncertainty, continued geopolitical tensions dampening tourism, commodity price volatility, and administrative capacity constraints delaying structural reforms.
  - Reconstruction offers upside opportunities to "build back better," but coordination challenges may cause implementation delays and under-execution.

### Policy issues and discussions — fiscal and PFM
- 2025 fiscal outturns and primary balance:
  - Vehicle imports exceeded Fourth Review projections: US$1.8 billion vs. US$1.0 billion.
  - 2025 tax revenues are expected to reach 14.8 percent of GDP, 0.9 percentage points above the Fourth Review projection.
  - Capital expenditure was under-executed, with only 45 percent of the allocation implemented by end-September.
  - The 2025 primary balance is expected to reach 3.4 percent of GDP—up from 2.3 percent projected at the Fourth Review—after accounting for the 2025 Supplementary Budget.
- Immediate fiscal responses:
  - 2025 Supplementary Budget: emergency disaster relief package of about LKR72 billion (0.2 percent of GDP), financed through reallocation within the 2025 Budget, including:
    - LKR550 million for disaster relief services;
    - LKR25,000 per affected family for home restoration;
    - reallocation of unspent capital expenditures toward reconstructions of damaged infrastructure;
    - weekly dry-ration allowance of LKR3,600 per affected individual;
    - LKR50,000 per displaced family for relocation;
    - up to LKR200,000 per hectare for damaged crops and livestock and LKR400,000 per damaged fishing boat.
  - 2026 Budget: Parliament approved a primary expenditure allocation of 12.9 percent of GDP and a primary balance target of 2.3 percent of GDP.
  - Authorities have a preliminary spending need estimate of around LKR500 billion (1.4 percent of GDP) in 2026 and intend to prepare a Supplementary Budget; intend to extend Aswesuma cash transfer vulnerable category by six months to end-June 2026.
- Debt restructuring and fiscal prudence:
  - Debt restructuring delivered substantial relief: public debt-to-GDP declined from 125.8 percent in 2022 to 105.7 percent in 2024; gross financing needs-to-GDP declined from 33.9 percent to 21.9 percent; interest-to-revenue from 79 percent to 56 percent.
  - Post-restructuring debt indicators remain elevated; authorities should design strategy to preserve debt sustainability while supporting recovery and reconstruction.
- Public financial management and governance:
  - Emergency spending must follow the PFM Act: supplementary under the 2026 budget must adhere to PFM Act procedures and be used only when needs cannot be met through virements, the annual budget reserve, or the Contingencies Fund.
  - Any breach of the primary expenditure ceiling must be justified under the Act’s escape clauses and accompanied by a recovery plan and corrective measures.
  - Draft PFM regulations—covering budget execution, fiscal rules, and enforcement procedures—are being finalized to specify safeguards.
  - All emergency spending, including allocations through the Rebuilding Sri Lanka Fund and donor contributions, must comply with PFM Act accountability and transparency requirements: publish procurement contracts, disclose beneficial ownership, document procurement deviations permitted under disaster response per National Procurement Commission guidelines, and provide regular public reporting and independent audits.
- Public investment management:
  - Rebuilding requires rigorous project selection and prioritization; authorities may need to defer or cancel lower-priority projects to create fiscal space.
  - Authorities are adopting standardized appraisal guidelines and integrating multi-year reconstruction commitments into the Medium-Term Fiscal Framework; ex-post evaluations and monitoring systems should be institutionalized.

*Approved by Sanjaya Panth (APD) and Martin Čihák (SPR). Discussions took place virtually during December 1–5, 2025; mission team and participants listed in the Executive Summary.*

---

### Central Bank of Sri Lanka (CBSL) measures and financial-sector impact

### CBSL operational measures
- Banks instructed to consider:
  - suspending repayment on credit facilities for 3-6 months,
  - extending loan facilities by up to two years to affected parties,
  - suspending cheque return charges and late payment fees until end-January 2026.
- CBSL contingency and policy stance:
  - CBSL stands ready to provide liquidity support to the financial system if necessary.
  - Monetary policy will remain agile to balance the need to support the economy and maintain price stability.
  - Foreign exchange sales will be limited to addressing disorderly market conditions.
  - CBSL should continue refraining from monetary financing of the budget.

### Financial-system impact and risks
- Expected borrower and insurer impacts:
  - Non-performing loans may rise further due to income losses and collateral damage.
  - Banks appear well positioned to absorb the impact, with capital ratios well above regulatory requirements.
  - Although insurance penetration is low, insurers may experience higher loss ratios and liquidity strains in the short term as claims are settled.
- Banking-sector indicators (selected, as presented):
  - Regulatory capital to risk weighted assets: 15.1…19.4 (series as presented).
  - Gross nonperforming loans to total gross loans: 8.4…11.9 (series as presented).
  - Return on equity (after tax): 20.4…18.5 (series as presented).
  - Liquid assets to total assets: 19.0…38.0 (series as presented).
- Monetary and financial sector guidance:
  - Central Bank instructed licensed banks to extend targeted relief, including temporary repayment concessions and restructuring options (suspending repayments for three to six months without additional interest charges), and offering new credit facilities with grace periods and capped interest rates.
  - Authorities prepared to provide liquidity support when necessary to maintain orderly market conditions.
  - Commitment to safeguard financial stability while advancing ongoing sectoral reforms to enhance medium‑term resilience.

---

### RFI request, capacity to repay, and staff appraisal

### RFI request: access level, purpose, and modalities
- Authorities requested a purchase under the RFI of 26 percent of quota or SDR150.5 million (about US$205 million, 0.2 percent of GDP).
- Rationale and intended use:
  - Cyclone Ditwah worsened Sri Lanka’s short-term outlook, giving rise to an urgent BOP need that, if unaddressed, would result in immediate and severe economic disruption.
  - The RFI is intended to provide crucial budget support to finance disaster response, including restoration of essential services, macro-critical infrastructure repairs, and emergency assistance to those affected.
  - The urgent BOP need triggered by Cyclone Ditwah is expected to be resolved within 12 months, without major changes to the authorities’ policy plans.
- Calibration and complementarities:
  - The proposed RFI access is calibrated to the urgent BOP need, estimated at US$720 million based on information available to date.
  - The RFI size represents about 28 percent of the total urgent BOP need caused by the cyclone.
  - Other development partners, including the World Bank and Asian Development Bank, are actively exploring options to provide rapid assistance (options include accelerating pre-committed financing and mobilizing new funding, including budget support).
  - On December 3, the Asian Development Bank announced US$3 million emergency grant for Sri Lanka for flood relief.
  - With the proposed RFI and its catalytic effect, the decline in reserves is expected to be contained at US$115 million, thereby allowing the authorities to maintain the path of reserve accumulation and strengthening market confidence and external sustainability.

### Debt sustainability assessment and capacity to repay (CtR)
- Debt sustainability context:
  - As assessed in the Fourth Review under the EFF, Sri Lanka’s debt sustainability is expected to be restored on forward looking basis following the completion of the recent comprehensive debt restructuring.
  - The assessment for this RFI request is based on the Sovereign Risk and Debt Sustainability Analysis Annex in IMF Country Report No. 25/162.
  - The increase in overall Fund credit commitments is small (26 percent of quota); the cyclone hit when the IMF-supported program was on track; and no significant changes to the medium-term macroeconomic framework and the medium-term debt outlook are expected from the disaster.
- Capacity to repay findings:
  - Sri Lanka’s capacity to repay (CtR) is adequate but subject to significant risks. This assessment is contingent on successful EFF program implementation.
  - CtR indicators have deteriorated temporarily compared to the Fourth Review.
  - Under the RFI and EFF, Fund credit outstanding would peak at 3.1 percent of GDP in 2027, unchanged from the Fourth Review.
  - Fund credit outstanding are higher when expressed as a percent of goods and services exports: 15.6 percent vs 14.1 percent.
  - Fund credit outstanding are higher when expressed as a percent of gross reserves: 25.6 percent vs 24.2 percent.
  - Repurchases and charges would peak later in 2032, but are of similar magnitude to the Fourth Review, at 2.3 percent of goods and services exports, and 3.6 percent of gross reserves.
- Safeguards:
  - Adequate safeguards are in place.
  - CBSL has implemented most recommendations from the 2023 Safeguards Assessment.
  - CBSL’s balance sheet continues to strengthen with equity reaching 1 percent of GDP at end-2024, reducing risks highlighted in the Safeguards Assessment.
  - CBSL continues to monitor its financial position and strengthen its balance sheet stress testing approach, including through an upcoming IMF TA.
  - CBSL has strengthened internal audit and risk management practices.
  - The RFI requires an update to the Safeguards Assessment, which will be completed in due course.

### Staff appraisal and policy recommendations
- Program commitment and objectives:
  - Authorities remain committed to the IMF-supported economic reform program and welcome ongoing policy to complete the next review under the EFF.
  - Program objectives remain: (i) restoring fiscal and debt sustainability while protecting the vulnerable, (ii) safeguarding price and financial sector stability, (iii) rebuilding external buffers, (iv) strengthening governance and reducing corruption vulnerabilities, and (v) enhancing growth-oriented structural reforms.
- Fiscal and reform guidance while addressing the emergency:
  - Even while addressing the emergency, sustaining revenue-based fiscal consolidation and comprehensive structural reforms remains crucial to durably restoring macroeconomic stability.
  - Debt sustainability risks are still high, and sustained improvement in public debt dynamics relies on continued fiscal discipline, leaving no room for policy slippage.
  - Emergency spending, social support, and reconstruction efforts need to be efficient and well-targeted amid limited fiscal space.
  - Authorities should design a careful strategy to preserve the path to debt sustainability while supporting Sri Lanka’s recovery and reconstruction.
  - Prioritizing spending is essential.
  - Clear communication of reform efforts, objectives, and constraints will be vital to foster public support and sustain reform momentum amid challenging circumstances.

- RFI decision and rationale (conclusion):
  - Staff support the authorities’ request for a purchase under the RFI of SDR150.5 million (26 percent of quota).
  - Justification:
    - The RFI is warranted by the urgent and temporary BOP need stemming from the exogenous shock, which if unaddressed, would result in immediate and severe economic disruption.
    - The RFI is expected to catalyze additional external financing.
    - In view of urgent fiscal financing needs and the delay in completing the Fifth Review under the EFF, staff also support providing the RFI in the form of budget support.

---

### Annex I — Disaster relief measures, human and physical impacts, and key quantitative figures

### Disaster relief measures and entitlements (selected)
- Cleaning and reallocation: 25,000 per housing unit (one-time)
- Essential kitchen items: 50,000 per housing unit (one-time)
- Loss of livelihoods: 25,000 (≤2 members); 50,000 (>2 members); monthly; 3 months
- Monthly rental allowance: 25,000 per month (max. 6 months)
- Damaged paddy, grains, maize, field crops: 150,000 per hectare (one-time)
- Damaged vegetable cultivations: 200,000 per hectare (one-time)
- Assistance for registered livestock farm owners: 200,000 per farm owner (one-time)
- Support for small and micro enterprises: 200,000 per unit (one-time)
- Damaged fishing boats: Up to 400,000 per boat (one-time)
- Children books and clothing: 15,000 per school child (one-time)
- Damaged business buildings: Up to 5,000,000 per unit (one-time)
- Construction of completely damaged houses: 5,000,000 per unit (one-time)
- House repair: Up to 2,500,000 per unit (one-time)
- Death or disability: 1,000,000 per person (one-time)

### Human and physical impact (selected)
- Death toll and missing: "over 600" (as of December 9) in one part of the document; elsewhere "over 800 fatalities (including those missing)".
- People affected: nearly two million people (over 9 percent of the population); elsewhere approximately 2 million people directly affected (around 10% of the population).
- Displaced: more than 100,000 people displaced.
- Rainfall and event duration: storm remained over the island for nearly 72 hours; some areas received more than 400 millimeters in a single day, equivalent to about 15–20% of the annual rainfall.
- Landslides and flooding: more than 1,200 landslides and widespread flooding.
- Land inundation: nearly 1.1 million hectares of land inundated, representing about 20% of the country’s total land area.
- Housing damage: over 6,000 homes completely destroyed and another 95,000 partially damaged.
- Agricultural damage: destruction of over 100,000 hectares of paddy fields (about 20% of paddy cultivation); significant losses in vegetable, maize, and other crops.
- Infrastructure damage: extensive damage to roads, bridges, railway networks, hospitals, power lines, water supply systems, and other essential public facilities; key transport routes, bridges, and rail lines rendered impassable.
- Livelihoods affected: severe impacts on agriculture, poultry, fisheries, and the SME sector (crop destruction, loss of livestock, damage to fishing infrastructure).

### Immediate fiscal response and estimated needs
- Urgent disaster relief announced by authorities: LKR 72 billion (0.2 percent of GDP), financed through a reallocation of 2025 budgetary expenditures.
- Preliminary recovery and reconstruction needs estimate: could reach LKR500 billion.
- Financing approach:
  - Prioritize spending reprioritization and reallocation and use of contingency allocations within the budget, before considering a Supplementary Budget in 2026.
  - Any emergency spending and any 2026 Supplementary Budget, if required, to be deployed in full compliance with the Public Financial Management Act and aligned with transparency and accountability standards.
- Authorities plan to leverage fiscal overperformance recorded in 2025 to mitigate fiscal pressures and minimize adverse impact on the medium‑term fiscal framework and public debt sustainability.

### Macroeconomic and external sector highlights (selected quantitative figures preserved verbatim)
- LKR 72 billion (0.2 percent of GDP): urgent disaster relief announced.
- LKR500 billion: preliminary estimate of recovery and reconstruction needs.
- SDR150.5 million (about US$205 million): RFI assistance requested; equals 26 percent of quota.
- 5.0%: Real GDP rebound in 2024.
- 4.8%: Real GDP growth in the first half of 2025.
- 5.4 % y/y: Q3-2025 GDP growth.
- 2.1% (y/y): Headline inflation in November (2025).
- 5%: Central Bank medium-term inflation target by 2026.
- Over 600 (as of December 9) / over 800 fatalities (including those missing): reported death tolls in different parts of the document.
- Nearly two million people (over 9 percent of the population) / approximately 2 million people directly affected (around 10% of the population): people affected.
- More than 100,000 people displaced.
- Nearly 1.1 million hectares inundated (about 20% of country’s total land area).
- Over 6,000 homes completely destroyed; another 95,000 partially damaged.
- Over 100,000 hectares of paddy fields destroyed (about 20% of paddy cultivation).
- Gross official reserves: USD 6.0 billion by end-November (2025), equivalent to about 3 months of import cover.
- Government revenue projected to reach over 15.6% of GDP in 2025; 8.2% of GDP in 2022.
- Primary surplus estimated at above 3.4% of GDP in 2025.
- Temporary repayment concessions and restructuring options: suspending repayments for three to six months without additional interest charges.

*Source: IMF staff report text on CBSL measures, RFI request, debt sustainability, and staff appraisal; Ministry of Finance; Letter of Intent and accompanying statements dated December 10, 2025, and related IMF staff text contained in Annex I.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Cyclone Ditwah struck on November 28, claiming more than 600 lives as of December 6 and affecting millions more.
- Severe flooding and landslides displaced over 100,000 people and destroyed houses, roads, bridges, rail lines, buildings including schools and hospitals, and hundreds of thousands of acres of agricultural land.
- More than 1.5 million people face moderate or high food insecurity; 23 percent of the population already lived below the poverty line and a further 10 percent is now at heightened risk.
- The disaster creates urgent humanitarian and reconstruction needs and acute balance-of-payments (BOP) pressures, at a time when Sri Lanka is emerging from a deep economic crisis and the IMF-supported reform program under the Extended Fund Facility (EFF) is beginning to bear fruit.
- Authorities requested support under the Rapid Financing Instrument (RFI) of SDR150.5 million (26 percent of quota, about US$205 million, 0.2 percent of GDP). The full amount will be available immediately for budget support upon Board approval.

### Economic impact of the cyclone
- Economic losses: Previous similar natural disasters resulted in economic losses of 2.5-5 percent of GDP. Recovery needs for the 2016 and 2017 floods were 1.1 and 0.8 percent of GDP, respectively. Damage from Cyclone Ditwah appears more severe than the 2016-17 floods.
- Growth: IMF staff’s preliminary assessment indicates growth could slow to 2.9 percent y/y in 2026, from 4.2 percent in 2025. Agriculture and tourism (together accounting for 11 percent of GDP) are likely to be the hardest-hit sectors; construction activity is likely to support growth during rebuilding.
- Prices: December 2025 inflation is projected to increase to 4.0 percent y/y from 2.1 percent y/y in November. 2026 average inflation is expected to increase to 5.4 percent y/y from 3.3 percent y/y forecast at the Fourth Review. Selected food items saw price surges of 30-200 percent due to shortages.
- Balance of payments: Preliminary assessment indicates the current account deficit could widen by about US$700 million (0.7 percent of GDP) in the next 12 months. Past 2016-17 disasters increased food and oil imports by 0.2 and 1.0 percent of GDP, respectively; higher remittances partially offset pressures.

### Outlook and risks
- Near-term: Macroeconomic stability had been restored prior to the cyclone; gross reserves had increased to three months of imports and inflation had been low. Growth is expected to return to potential at 3.1 percent in 2027, with inflation returning to target.
- Risks: High uncertainty with downside tilt. Risks include heightened external and debt sustainability pressures, possible reimposition of a higher tariff by the US lowering exports and growth, prolonged trade policy uncertainty, continued geopolitical tensions dampening tourism, commodity price volatility, and administrative capacity constraints delaying structural reforms.
- Reconstruction offers upside opportunities to "build back better," but coordination challenges may cause implementation delays and under-execution.

### Policy issues and discussions
- 2025 fiscal outturns and primary balance:
  - Vehicle imports exceeded Fourth Review projections: US$1.8 billion vs. US$1.0 billion.
  - 2025 tax revenues are expected to reach 14.8 percent of GDP, 0.9 percentage points above the Fourth Review projection.
  - Capital expenditure was under-executed, with only 45 percent of the allocation implemented by end-September.
  - The 2025 primary balance is expected to reach 3.4 percent of GDP—up from 2.3 percent projected at the Fourth Review—after accounting for the 2025 Supplementary Budget.
- Immediate fiscal responses:
  - 2025 Supplementary Budget: emergency disaster relief package of about LKR72 billion (0.2 percent of GDP), financed through reallocation within the 2025 Budget, including:
    - LKR550 million for disaster relief services;
    - LKR25,000 per affected family for home restoration;
    - reallocation of unspent capital expenditures toward reconstructions of damaged infrastructure;
    - weekly dry-ration allowance of LKR3,600 per affected individual;
    - LKR50,000 per displaced family for relocation;
    - up to LKR200,000 per hectare for damaged crops and livestock and LKR400,000 per damaged fishing boat.
  - 2026 Budget: Parliament approved a primary expenditure allocation of 12.9 percent of GDP and a primary balance target of 2.3 percent of GDP. Authorities have a preliminary spending need estimate of around LKR500 billion (1.4 percent of GDP) in 2026 and intend to prepare a Supplementary Budget; intend to extend Aswesuma cash transfer vulnerable category by six months to end-June 2026.
- Debt sustainability and fiscal prudence:
  - Debt restructuring delivered substantial relief: public debt-to-GDP declined from 125.8 percent in 2022 to 105.7 percent in 2024; gross financing needs-to-GDP declined from 33.9 percent to 21.9 percent; interest-to-revenue from 79 percent to 56 percent.
  - Post-restructuring debt indicators remain elevated; authorities should design strategy to preserve debt sustainability while supporting recovery and reconstruction.
- Public financial management and governance:
  - Emergency spending must follow the PFM Act: supplementary under the 2026 budget must adhere to PFM Act procedures and be used only when needs cannot be met through virements, the annual budget reserve, or the Contingencies Fund. Any breach of the primary expenditure ceiling must be justified under the Act’s escape clauses and accompanied by a recovery plan and corrective measures.
  - Draft PFM regulations—covering budget execution, fiscal rules, and enforcement procedures—are being finalized to specify safeguards.
  - All emergency spending, including allocations through the Rebuilding Sri Lanka Fund and donor contributions, must comply with PFM Act accountability and transparency requirements: publish procurement contracts, disclose beneficial ownership, document procurement deviations permitted under disaster response per National Procurement Commission guidelines, and provide regular public reporting and independent audits.
- Public investment management:
  - Rebuilding requires rigorous project selection and prioritization; authorities may need to defer or cancel lower-priority projects to create fiscal space.
  - Authorities are adopting standardized appraisal guidelines and integrating multi-year reconstruction commitments into the Medium-Term Fiscal Framework; ex-post evaluations and monitoring systems should be institutionalized.

*Approved by Sanjaya Panth (APD) and Martin Čihák (SPR). Discussions took place virtually during December 1–5, 2025; mission team and participants listed in the Executive Summary.*

### 14.      Central Bank of Sri Lanka (CBSL) announced measures to support affected borrowers.

### Central Bank of Sri Lanka (CBSL) announced measures to support affected borrowers.

### CBSL operational measures and financial-system impact
- Banks instructed to consider:
  - suspending repayment on credit facilities for 3-6 months,
  - extending loan facilities by up to two years to affected parties,
  - suspending cheque return charges and late payment fees until end-January 2026.
- Expected borrower and insurer impacts:
  - Non-performing loans may rise further due to income losses and collateral damage.
  - Banks appear well positioned to absorb the impact, with capital ratios well above regulatory requirements.
  - Although insurance penetration is low, insurers may experience higher loss ratios and liquidity strains in the short term as claims are settled.
- CBSL contingency and policy stance:
  - CBSL stands ready to provide liquidity support to the financial system if necessary.
  - Monetary policy will remain agile to balance the need to support the economy and maintain price stability.
  - Foreign exchange sales will be limited to addressing disorderly market conditions.
  - CBSL should continue refraining from monetary financing of the budget.

### RFI request: access level, purpose, and modalities
- Authorities requested a purchase under the RFI of 26 percent of quota or SDR150.5 million (about US$205 million, 0.2 percent of GDP).
- Rationale and intended use:
  - Cyclone Ditwah worsened Sri Lanka’s short-term outlook, giving rise to an urgent BOP need that, if unaddressed, would result in immediate and severe economic disruption.
  - The RFI is intended to provide crucial budget support to finance disaster response, including restoration of essential services, macro-critical infrastructure repairs, and emergency assistance to those affected.
  - The urgent BOP need triggered by Cyclone Ditwah is expected to be resolved within 12 months, without major changes to the authorities’ policy plans.
- Calibration and complementarities:
  - The proposed RFI access is calibrated to the urgent BOP need, estimated at US$720 million based on information available to date.
  - The RFI size represents about 28 percent of the total urgent BOP need caused by the cyclone.
  - Other development partners, including the World Bank and Asian Development Bank, are actively exploring options to provide rapid assistance (options include accelerating pre-committed financing and mobilizing new funding, including budget support).
  - On December 3, the Asian Development Bank announced US$3 million emergency grant for Sri Lanka for flood relief.
  - With the proposed RFI and its catalytic effect, the decline in reserves is expected to be contained at US$115 million, thereby allowing the authorities to maintain the path of reserve accumulation and strengthening market confidence and external sustainability.

### Debt sustainability assessment and capacity to repay
- Debt sustainability context:
  - As assessed in the Fourth Review under the EFF, Sri Lanka’s debt sustainability is expected to be restored on forward looking basis following the completion of the recent comprehensive debt restructuring.
  - The assessment for this RFI request is based on the Sovereign Risk and Debt Sustainability Analysis Annex in IMF Country Report No. 25/162.
  - The increase in overall Fund credit commitments is small (26 percent of quota); the cyclone hit when the IMF-supported program was on track; and no significant changes to the medium-term macroeconomic framework and the medium-term debt outlook are expected from the disaster.
- Capacity to repay (CtR) findings:
  - Sri Lanka’s capacity to repay (CtR) is adequate but subject to significant risks. This assessment is contingent on successful EFF program implementation.
  - CtR indicators have deteriorated temporarily compared to the Fourth Review.
  - Under the RFI and EFF, Fund credit outstanding would peak at 3.1 percent of GDP in 2027, unchanged from the Fourth Review.
  - Fund credit outstanding are higher when expressed as a percent of goods and services exports: 15.6 percent vs 14.1 percent.
  - Fund credit outstanding are higher when expressed as a percent of gross reserves: 25.6 percent vs 24.2 percent.
  - Repurchases and charges would peak later in 2032, but are of similar magnitude to the Fourth Review, at 2.3 percent of goods and services exports, and 3.6 percent of gross reserves.
- Safeguards:
  - Adequate safeguards are in place.
  - CBSL has implemented most recommendations from the 2023 Safeguards Assessment.
  - CBSL’s balance sheet continues to strengthen with equity reaching 1 percent of GDP at end-2024, reducing risks highlighted in the Safeguards Assessment.
  - CBSL continues to monitor its financial position and strengthen its balance sheet stress testing approach, including through an upcoming IMF TA.
  - CBSL has strengthened internal audit and risk management practices.
  - The RFI requires an update to the Safeguards Assessment, which will be completed in due course.

### Staff appraisal and policy recommendations
- Program commitment and objectives:
  - Authorities remain committed to the IMF-supported economic reform program and welcome ongoing policy to complete the next review under the EFF.
  - Program objectives remain: (i) restoring fiscal and debt sustainability while protecting the vulnerable, (ii) safeguarding price and financial sector stability, (iii) rebuilding external buffers, (iv) strengthening governance and reducing corruption vulnerabilities, and (v) enhancing growth-oriented structural reforms.
- Fiscal and reform guidance while addressing the emergency:
  - Even while addressing the emergency, sustaining revenue-based fiscal consolidation and comprehensive structural reforms remains crucial to durably restoring macroeconomic stability.
  - Debt sustainability risks are still high, and sustained improvement in public debt dynamics relies on continued fiscal discipline, leaving no room for policy slippage.
  - Emergency spending, social support, and reconstruction efforts need to be efficient and well-targeted amid limited fiscal space.
  - Authorities should design a careful strategy to preserve the path to debt sustainability while supporting Sri Lanka’s recovery and reconstruction.
  - Prioritizing spending is essential.
  - Clear communication of reform efforts, objectives, and constraints will be vital to foster public support and sustain reform momentum amid challenging circumstances.

*Source: IMF staff report text on CBSL measures, RFI request, debt sustainability, and staff appraisal.*

### 23.      Given the nature of the emergency and the government’s steadfast reform

### 23.      Given the nature of the emergency and the government’s steadfast reform implementation

### RFI decision and rationale
- Staff support the authorities’ request for a purchase under the RFI of SDR150.5 million (26 percent of quota).
- Justification:
  - The RFI is warranted by the urgent and temporary BOP need stemming from the exogenous shock, which if unaddressed, would result in immediate and severe economic disruption.
  - The RFI is expected to catalyze additional external financing.
  - In view of urgent fiscal financing needs and the delay in completing the Fifth Review under the EFF, staff also support providing the RFI in the form of budget support.

### Selected macroeconomic indicators (Table 1—highlights as presented)
- Real GDP growth5.05.03.54.23.12.93.13.13.13.13.1
- Inflation (average) 1/1.21.23.3-0.35.25.45.05.05.05.05.0
- Inflation (end-of-period) 1/-1.5-1.58.92.85.25.75.05.25.05.05.0
- GDP Deflator growth3.83.83.62.25.35.45.15.05.05.05.0
- Nominal GDP growth9.09.07.16.48.58.58.48.28.38.38.2
- National savings 2/25.228.721.825.522.223.222.923.322.822.622.6
- National Investment27.027.021.824.922.123.622.523.223.022.822.7
- Central government gross financing needs21.921.922.621.619.619.814.914.813.911.711.3
- Central government debt100.5100.8105.199.8103.4100.6100.297.996.393.791.1
- Public debt 3/105.2105.7109.6104.1107.4104.6103.6101.399.496.593.7
- Exports12,77212,77212,88013,23113,49013,38214,19414,18115,04915,88016,841
- Imports-18,828-18,841-21,363-21,281-22,447-22,664-23,578-23,291-24,479-25,634-26,516
- Current account balance1,7461,733-48604-77-386-439107-199-299-17
- Gross official reserves (end of period) In millions of U.S. dollars6,1226,1227,2556,5509,2738,88412,97413,37115,65116,47917,547
- Gross official reserves (in percent of ARA composite metric)50.550.560.353.175.570.4100.0100.0107.4116.4121.4
- Gross official reserves accounting for PBOC Swap conditions (end of period) In millions of U.S. dollars4,6864,7167,2555,1449,2738,88412,97413,37115,65116,47917,547

### Fiscal operations (Table 2a/2b—central government highlights)
- Total revenue and grants (in billions of rupees)4,0914,8195,0765,2965,2475,7645,6966,1806,6917,253
- Total revenue (in billions of rupees)4,0314,7895,0475,2635,2155,7285,6616,1426,6497,209
- Tax revenue (in billions of rupees)3,7054,4394,7034,9224,8595,3645,3165,7886,2826,823
- Total expenditure and net lending (in billions of rupees)5,7136,5556,4496,8506,8967,2207,0967,6788,2728,896
- Primary spending (in billions of rupees)3,4404,0823,9954,4904,5574,8814,8205,2415,6756,154
- Interest payments (in billions of rupees)2,2722,4732,4542,3602,3392,3392,2762,4372,5982,742
- Overall balance -1,752-1,736-1,372-1,553-1,649-1,456-1,400-1,498-1,582-1,642
- Central government primary balance (memorandum)5207371,0828066908838769381,0161,100
- Central government debt (in billions of rupees)30,15033,65931,74735,95334,71737,75036,55038,95641,02943,198
- Fiscal ratios (selected, percent of GDP): Total revenue and grants13.713.715.016.015.215.215.315.215.315.315.3; Total expenditure19.319.120.520.319.720.019.219.019.018.918.8; Overall balance -6.1-5.9-5.4-4.3-4.5-4.8-3.9-3.7-3.7-3.6-3.5

### Balance of payments, financing, and reserves (Tables 4a/4b, 5)
- Current account (millions of dollars)1,733-48604-77-386-439107-199-299-17
- Balance on goods (millions of dollars)-6,069-8,483-8,050-8,957-9,283-9,383-9,109-9,431-9,754-9,675
- Balance on services (millions of dollars)3,4353,9493,4854,1633,4154,2803,7733,8723,9674,040
- Primary income, net-2,072-2,461-2,461-2,351-2,351-2,527-2,527-2,667-2,673-2,679
- Secondary income, net6,4396,9477,6317,0697,8337,1917,9708,0268,1618,297 (Of which: workers' remittances (net)6,4296,9377,6217,0597,8237,1817,9608,0168,1518,287)
- Financial account (millions of dollars) 1/247-371851-1,602-1,875-3,976-4,212-2,687-1,461-1,526
- Overall balance (- = need of inflow) 1/  1,498336-2341,5371,5013,5494,3312,5001,1741,521
- Gross international reserves (millions of dollars, per Table 4a)1,7301,1334282,0172,3343,7014,4872,2818281,068
- Change in reserve assets (millions of dollars)1,6241,1334282,0172,3343,7014,4872,2818281,068 (as presented)
- Gross official reserves (summary from Table 5)6,1227,2556,5509,2738,88412,97413,37115,65116,47917,547
- External financing gaps and exceptional financing (Table 5): External financing gap4,3804,6194,1322,9571,1041,015843; Exceptional Financing4,3804,6194,1322,9571,1041,015843 (including IMF EFF3378771,036347000; IFI budget support6585101,098564284400400; Debt relief2,7403,2321,9992,046820615443)

### Monetary and financial sector indicators (Tables 3, 6)
- Reserve money15.815.86.515.88.56.68.48.28.38.38.2 (percent change, end of period – as presented in Table 1)
- Broad money8.68.66.512.08.512.58.48.28.38.38.2 (percent change)
- Selected banking soundness indicators (Table 6—All Banks, 2022-25Q2):
  - Regulatory capital to risk weighted assets15.115.215.316.216.516.916.418.417.718.018.520.319.419.4
  - Tier 1 capital/risk weighted assets12.112.212.413.213.513.913.515.214.515.014.816.716.016.1
  - Gross nonperforming loans to total gross loans 8.48.910.811.612.913.413.412.812.812.612.612.712.511.9
  - Return on equity (after tax)20.48.88.010.410.210.211.111.511.112.713.317.418.718.5
  - Liquid assets to total assets19.014.716.818.522.124.530.032.234.634.435.338.638.138.0

### Capacity to repay the Fund (Table 7—selected projections)
- Fund repurchases and charges (in millions of SDR)245.0256.4267.7283.5366.6428.1441.0470.5415.4298.2268.0156.0 (2025–2036 as presented)
- Fund repurchases and charges (in millions of U.S. dollars)330.5349.5365.6387.2500.7584.7602.3642.5567.3407.3366.1213.1
- Fund repurchases and charges (In percent of quota)42.344.346.349.063.374.076.281.371.851.546.327.0
- Fund credit outstanding (in millions of SDR)1,771.9   2,385.2   2,499.3   2,339.12,086.11,756.81,397.0994.8635.0381.0148.221.2
- Fund credit outstanding (in millions of U.S. dollars)2,4103,2543,4183,1992,852.52,402.31,910.31,360.3868.3521.0202.628.9
- Projections dated: Projections as of December 4, 2025.

*Sources: Data provided by the Sri Lankan authorities; CBSL; and IMF staff estimates and projections.*

### Annex I. Disaster Relief Measures for 2025 and 2026

### Annex I. Disaster Relief Measures for 2025 and 2026

### Disaster relief measures and entitlements
- Cleaning and reallocation: 25,000 per housing unit (one-time)
- Essential kitchen items: 50,000 per housing unit (one-time)
- Loss of livelihoods: 25,000 (≤2 members); 50,000 (>2 members); monthly; 3 months
- Monthly rental allowance: 25,000 per month (max. 6 months)
- Damaged paddy, grains, maize, field crops: 150,000 per hectare (one-time)
- Damaged vegetable cultivations: 200,000 per hectare (one-time)
- Assistance for registered livestock farm owners: 200,000 per farm owner (one-time)
- Support for small and micro enterprises: 200,000 per unit (one-time)
- Damaged fishing boats: Up to 400,000 per boat (one-time)
- Children books and clothing: 15,000 per school child (one-time)
- Damaged business buildings: Up to 5,000,000 per unit (one-time)
- Construction of completely damaged houses: 5,000,000 per unit (one-time)
- House repair: Up to 2,500,000 per unit (one-time)
- Death or disability: 1,000,000 per person (one-time)
- Source: Ministry of Finance.

### Human and physical impact of Cyclone Ditwah
- Death toll and missing: "over 600" (as of December 9) in one part of the document; elsewhere "over 800 fatalities (including those missing)".
- People affected: nearly two million people (over 9 percent of the population); elsewhere approximately 2 million people directly affected (around 10% of the population).
- Displaced: more than 100,000 people displaced.
- Rainfall and event duration: storm remained over the island for nearly 72 hours; some areas received more than 400 millimeters in a single day, equivalent to about 15–20% of the annual rainfall.
- Landslides and flooding: more than 1,200 landslides and widespread flooding.
- Land inundation: nearly 1.1 million hectares of land inundated, representing about 20% of the country’s total land area.
- Housing damage: over 6,000 homes completely destroyed and another 95,000 partially damaged.
- Agricultural damage: destruction of over 100,000 hectares of paddy fields (about 20% of paddy cultivation); significant losses in vegetable, maize, and other crops.
- Infrastructure damage: extensive damage to roads, bridges, railway networks, hospitals, power lines, water supply systems, and other essential public facilities; key transport routes, bridges, and rail lines rendered impassable.
- Livelihoods affected: severe impacts on agriculture, poultry, fisheries, and the SME sector (crop destruction, loss of livestock, damage to fishing infrastructure).

### Immediate fiscal response and estimated needs
- Urgent disaster relief announced by authorities: LKR 72 billion (0.2 percent of GDP), financed through a reallocation of 2025 budgetary expenditures.
- Preliminary recovery and reconstruction needs estimate: could reach LKR500 billion.
- Financing approach: prioritize spending reprioritization and reallocation and use of contingency allocations within the budget, before considering a Supplementary Budget in 2026; any emergency spending and any 2026 Supplementary Budget, if required, to be deployed in full compliance with the Public Financial Management Act and aligned with transparency and accountability standards.
- Authorities plan to leverage fiscal overperformance recorded in 2025 to mitigate fiscal pressures and minimize adverse impact on the medium‑term fiscal framework and public debt sustainability.

### Macroeconomic impact — growth and inflation
- Pre-cyclone growth trajectory:
  - Real GDP rebounded by 5.0% in 2024.
  - Real GDP grew by 4.8% in the first half of 2025.
  - Q3-2025 grew by 5.4 % y/y.
- Inflation:
  - Headline inflation: 2.1% (y/y) in November (2025).
  - Central Bank medium-term target: 5% by 2026.
- Short-term outlook post-cyclone:
  - Cyclone-related disruptions and infrastructure losses likely weighed on near‑term economic activity.
  - Reconstruction expected to accelerate capital expenditure and support recovery provided adequate financing is secured.
  - Post-cyclone inflation likely to experience a transitory uptick driven by food supply disruptions; expected to dissipate as supply chains normalize.
  - Monetary policy: expected to remain appropriately accommodative while maintaining vigilance to ensure inflation converges to target.

### Macroeconomic impact — fiscal and external sector pressures
- Revenue and fiscal position pre-cyclone:
  - Government revenue projected to reach over 15.6% of GDP in 2025 (highest since 2007), up from 8.2% of GDP in 2022.
  - Primary surplus estimated at above 3.4% of GDP in 2025.
- Cyclone fiscal effects:
  - Reconstruction-related expenditures expected to widen the fiscal deficit modestly, with the primary surplus falling short of initial 2026 targets.
  - Immediate relief financed through reallocations within the 2025 Budget; additional appropriations for 2026 will adhere to legal and procedural safeguards.
  - Authorities aim to establish dedicated funding mechanisms and risk-transfer instruments, supported by adequate financial and technical resources.
  - Emergency-related spending (including through the Rebuilding Sri Lanka Fund and donor-financed initiatives) to be well-targeted, time-bound, and aligned with the Public Financial Management Act.
  - Public investment management reforms to be accelerated with rigorous project prioritization to create fiscal space and maintain alignment with the Debt Sustainability Analysis framework.
- External sector:
  - Cyclone coincided with peak tourism season; infrastructure damage and travel disruptions expected to dampen tourism receipts.
  - Export performance likely to soften due to supply-chain interruptions.
  - Increased import demand for food, fuel, and reconstruction materials expected to widen the external financing gap and pressure the balance of payments.
  - Gross official reserves reached USD 6.0 billion by end-November (2025), equivalent to about 3 months of import cover, supported by net foreign exchange purchases by the Central Bank and disbursements from multilateral institutions.
  - Maintaining reserve adequacy emphasized in light of post-cyclone external pressures.

### Financial sector impact and policy measures
- Pre-disaster financial sector condition:
  - Notable resilience in 2025: solid capital and liquidity buffers, improving asset quality despite still-elevated NPLs, rebound in profitability.
  - Banks recorded fastest pace of asset expansion in recent years, strengthened liquidity positions, and capital adequacy ratios well above regulatory thresholds.
  - Finance company sector broadly sound; equity markets benefited from renewed investor confidence.
- Cyclone-induced vulnerabilities:
  - Amplified risks in sectors with significant credit exposure: construction, wholesale and retail trade, tourism, and agriculture.
  - SMEs and households with restructured loans face additional income losses and higher recovery costs, heightening asset quality risks.
  - Physical collateral damage may have eroded asset values and constrained borrowers’ repayment capacity.
- Regulatory and policy response:
  - Central Bank instructed licensed banks to extend targeted relief, including temporary repayment concessions and restructuring options (suspending repayments for three to six months without additional interest charges), and offering new credit facilities with grace periods and capped interest rates.
  - Authorities prepared to provide liquidity support when necessary to maintain orderly market conditions.
  - Commitment to safeguard financial stability while advancing ongoing sectoral reforms to enhance medium‑term resilience.

### Social impact and poverty
- Disproportionate effects on vulnerable communities, particularly in the central highlands, north-western and eastern provinces.
- Poverty context:
  - Sri Lanka’s poverty rate had doubled to approximately 25% following the 2022 economic crisis.
- Food security and livelihoods:
  - Destruction of homes, livelihoods, and subsistence farms threatens food security for low-income households.
- Government response:
  - National emergency declared; mobilized military and civil defense resources; working with international and bilateral partners to provide essential relief services.

### Need for Rapid Financing Instrument (RFI) assistance and program commitments
- RFI request:
  - Authorities requested financial assistance under the Rapid Financing Instrument (RFI) for 26 percent of quota or SDR150.5 million (about US$205 million).
  - The request amount: SDR 150.5 million (approximately USD 205 million, or 0.2% of GDP).
  - This amount represents 26% of Sri Lanka’s quota and is within access limits for natural disaster-related support.
- Purpose and sequencing:
  - RFI resources for budget support to help avert an immediate liquidity crunch, provide space to advance reconstruction efforts, and sustain key reforms.
  - Authorities decided to postpone the Fifth Review of the Extended Fund Facility (EFF) arrangement to early 2026 to assess damage and reassess macroeconomic projections and recovery needs.
- Policy commitments under the EFF-supported program:
  - Restore fiscal and debt sustainability while protecting the vulnerable.
  - Safeguard price and financial sector stability.
  - Rebuild external buffers.
  - Strengthen governance and reduce corruption vulnerabilities.
  - Enhance growth-oriented structural reforms.
- Specific commitments:
  - Prioritize spending reallocations and contingency reserves within the existing budget framework; consider a supplementary budget as necessary; ensure full compliance with the Public Financial Management Act.
  - All emergency spending to adhere to strict transparency and accountability standards.
  - Central Bank will continue refraining from monetary financing of the deficit.
  - Authorities will not impose new or intensify existing restrictions on payments and transfers for current international transactions, trade restrictions, or multiple currency practices, or enter bilateral payments agreements inconsistent with Article VIII of the Fund's Articles of Agreement.
  - Authorities will consult with the Fund ahead of any revisions regarding the policies outlined in the Letter of Intent, in accordance with the Fund’s policies on such consultations.
  - Authorization for the IMF to publish the Letter of Intent and the Staff Report on the request for a purchase under the RFI.

### Key quantitative figures (preserved verbatim)
- LKR 72 billion (0.2 percent of GDP): urgent disaster relief announced.
- LKR500 billion: preliminary estimate of recovery and reconstruction needs.
- SDR150.5 million (about US$205 million): RFI assistance requested; equals 26 percent of quota.
- 5.0%: Real GDP rebound in 2024.
- 4.8%: Real GDP growth in the first half of 2025.
- 5.4 % y/y: Q3-2025 GDP growth.
- 2.1% (y/y): Headline inflation in November (2025).
- 5%: Central Bank medium-term inflation target by 2026.
- Over 600 (as of December 9) / over 800 fatalities (including those missing): reported death tolls in different parts of the document.
- Nearly two million people (over 9 percent of the population) / approximately 2 million people directly affected (around 10% of the population): people affected.
- More than 100,000 people displaced.
- Nearly 1.1 million hectares inundated (about 20% of country’s total land area).
- Over 6,000 homes completely destroyed; another 95,000 partially damaged.
- Over 100,000 hectares of paddy fields destroyed (about 20% of paddy cultivation).
- Gross official reserves: USD 6.0 billion by end-November (2025), equivalent to about 3 months of import cover.
- Government revenue projected to reach over 15.6% of GDP in 2025; 8.2% of GDP in 2022.
- Primary surplus estimated at above 3.4% of GDP in 2025.
- Temporary repayment concessions and restructuring options: suspending repayments for three to six months without additional interest charges.

*Source: Ministry of Finance; Letter of Intent and accompanying statements dated December 10, 2025, and related IMF staff text contained in Annex I.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1lkaea2025003-source-pdf.pdf_