Sri Lanka’s central bank warns El Nino could hit economic recovery

Sri Lanka's central bank warned that worsening weather linked to El Nino could create fresh strains on households and businesses, hurting banks through rising loan defaults. (Reuters pic) COLOMBO: Sri Lanka's fragile recovery from its worst economic crisis in decades could be undermined by the country's worst-ever El Nino conditions, the central bank has warned.

The Central Bank of Sri Lanka also said last year's Cyclone Ditwah, which killed some 650 people and caused billions in damage, had weakened asset values and increased risks for lenders as the island emerges from its 2022 sovereign default.

"Climate-related risks, such as the El Nino phenomenon, and elevated volatility in financial markets created a challenging external environment, with potential implications for domestic macroeconomic and financial stability," the bank said in a report published late Monday.

The World Bank has estimated infrastructure losses from the cyclone at around US$4.1 billion, while the government has launched a US$1.6 billion recovery programme.

Sri Lanka is recovering from an unprecedented economic meltdown that culminated in its first sovereign default in April 2022 after it ran out of foreign exchange to pay for essential imports.

Shortages of food, fuel and medicines triggered months of protests that forced then-president Gotabaya Rajapaksa from office.

After securing a US$2.9 billion IMF bailout in March 2023, Colombo restructured its foreign debt and returned to growth, with the World Bank saying the economy has recovered to pre-crisis levels.

But the central bank warned that worsening weather linked to El Nino could create fresh strains on households and businesses, hurting banks through rising loan defaults.

Sri Lanka's Meteorological Department has forecast torrential rains through December followed by a prolonged drought early next year, describing the current El Nino episode as the worst the country has experienced.

"The current El Nino-related weather conditions would exert pressure on financial institutions through a deterioration in credit quality," the report said.

El Nino is a naturally occurring climate pattern associated with warmer ocean temperatures in the Pacific that can change wind and rainfall patterns around the world.

Scientists say human-caused climate change can amplify its effects by making more energy and moisture available to fuel extreme weather.