The stated objectives of the interim budget—relief for the displaced (Rs. 100 billion), infrastructure development (Rs. 250 billion), and restoring living standards (Rs. 150 billion)—are commendable and necessary. The swiftness of the government's intervention, as noted by the United Nations, is a positive signal of decisive leadership, a quality often found wanting in the face of national crises. However, the very necessity of this interim budget, presented shortly after the main annual budget, underscores a systemic vulnerability that transcends the immediate natural disaster.
The Normalisation of the 'Interim'
The prompt rightly highlights the unusual frequency of interim budgets in Sri Lanka’s recent history. The interim budget under President Ranil Wickremesinghe following the 2022 political and economic upheaval, and the subsequent temporary budget by President Anura Kumara Dissanayake after the 2024 presidential election, established a pattern. While the context for each—political transition, economic collapse, and now, natural disaster—differs, the cumulative effect is the normalisation of fiscal discontinuity.
From a PFM perspective, the annual budget is the primary tool for resource allocation, policy implementation, and fiscal signaling. Frequent deviations via interim budgets, even when justified by extraordinary circumstances, can erode the credibility of the initial budget and complicate expenditure control. It suggests a reactive, rather than proactive, fiscal framework. The underlying issue is not the need to spend, but the lack of a robust, pre-funded, and contingent fiscal mechanism to address predictable shocks.
The 2022 economic crisis exposed the severe limitations of Sri Lanka’s fiscal space. The country’s public debt-to-GDP ratio had soared, reaching an estimated 113.8% in 2022, making it one of the most indebted nations in the region [1]. The subsequent debt restructuring and the implementation of painful, unpopular reforms—including tax hikes and expenditure rationalisation—were the bitter medicine required to stabilise the economy. The prompt correctly observes that the current government's ability to allocate Rs. 500 billion without immediate recourse to foreign aid is a direct consequence of the fiscal space created by these preceding, difficult reforms. This is a crucial point: the current capacity is not solely a testament to the new administration's management, but a dividend of the painful austerity measures implemented since 2022.
The Fiscal Cost of Climate Shocks: A Development Economics Perspective
The allocation of Rs. 500 billion, or approximately 500,000 crores, must be critically assessed against the backdrop of Sri Lanka’s Gross Domestic Product (GDP). While the government was reportedly on track for a budget surplus of 3.8% of GDP for 2025, a figure that signals significant fiscal health, the Rs. 500 billion allocation represents a substantial, unplanned expenditure.
To contextualise this, we must look at the estimated fiscal cost of natural disasters in the region. Studies indicate that the average expected fiscal cost of natural disasters in developing countries is between 0.5% and 1% of GDP per annum, a figure that is projected to rise due to climate change [2]. Given Sri Lanka's GDP, a Rs. 500 billion outlay is a significant shock to the fiscal balance, potentially consuming a large portion of the projected 3.8% surplus.
The challenge for the National People's Power (NPP)
government is twofold: first, to ensure the effective and transparent
utilisation of these funds, and second, to prevent this necessary expenditure
from derailing the hard-won fiscal consolidation path.
|
Interim Budget Allocation (Rs. Billion) |
Objective |
Share of Total (%) |
Development Economics Implication |
|
100 |
Compensation for damaged houses |
20% |
Immediate humanitarian relief; critical for social
stability and poverty reduction. |
|
250 |
Infrastructure development |
50% |
Investment in resilience; must focus on climate-proof
"build back better" principles. |
|
150 |
Improving living standards |
30% |
Social safety net expansion; requires robust targeting
to avoid leakage and ensure long-term impact. |
|
500 |
Total |
100% |
Significant
unplanned fiscal shock; tests the resilience of the PFM framework. |
The largest allocation, Rs. 250 billion for infrastructure, presents a critical opportunity. The concept of "build back better" is not merely a slogan; it is a development imperative. Post-disaster reconstruction must incorporate climate-resilient engineering standards, particularly for highways and bridges, to ensure that future climate shocks do not necessitate repeated, costly interim budgets. Failure to do so would transform the Rs. 250 billion from an investment into a recurring liability.
Best Practices in Disaster Risk Financing
My experience in working with UN agencies internationally has highlighted the global shift towards proactive Disaster Risk Financing (DRF) mechanisms. The current approach—allocating funds for immediate welfare and then seeking foreign aid for future reconstruction—is a traditional, yet fiscally inefficient, model.
Practical Solutions and Recommendations:
1
Establish
a Dedicated Disaster Contingency Fund (DCF): The government
should institutionalise a dedicated, ring-fenced fund, capitalised annually
through a small, fixed percentage of the national budget (e.g., 0.2% of GDP)
and supplemented by international climate finance. This DCF would provide
immediate liquidity for disaster response, reducing the reliance on ad-hoc interim
budgets and maintaining the integrity of the main budget. Bangladesh, for
instance, has been actively exploring strategies to secure its fiscal regime
against disaster costs through dedicated funds and risk transfer mechanisms
[3].
2
Implement
Risk Transfer Mechanisms (Insurance): The World Bank notes that
in developing countries, only about 10% of the direct economic costs of natural
hazards are insured [4]. Sri Lanka must explore public-private partnerships to
develop affordable, parametric disaster risk insurance. This transfers the risk
from the government's balance sheet to the private sector and international
reinsurance markets, providing rapid, pre-agreed payouts based on measurable
triggers (e.g., wind speed, rainfall), thereby speeding up relief efforts and
reducing the burden on the national treasury.
3 Conditional Budgeting and Ex-Post Audits: The prompt rightly stresses the importance of preventing the misuse of public finance. To ensure the Rs. 500 billion is used to maximum effect, the government must adopt a system of conditional budgeting. This involves setting clear, measurable performance indicators for the allocated funds and making subsequent tranches conditional on the successful completion and audited verification of the previous phase. Furthermore, an independent, ex-post audit mechanism, perhaps involving the Auditor General's Department and civil society oversight, should be mandated to review the expenditure within six months. This fosters accountability and rebuilds public trust, which is essential for sustaining difficult reforms.
The Political Economy of Fiscal Discipline
The political commentary surrounding the interim
budget—the rush to claim that Sri Lanka has "risen again" and the
attribution of the fiscal capacity solely to the NPP government—must be treated
with caution. While the 3.8% projected surplus is a significant achievement, it
is the result of a continuum of policy decisions.
The Way Forward: Resilience and Accountability
The Rs. 500 billion interim budget is a moment of truth for Sri Lanka’s PFM system. It tests the government's ability to manage a crisis while adhering to the principles of fiscal prudence it has championed.
Key Issues and the Best Way Forward:
4
Transparency
and Public Trust: The government must publish a detailed,
real-time expenditure tracker for the Rs. 500 billion. This level of
transparency is the most effective antidote to the "great sin" of
public finance misuse. It transforms the opposition's role from mere critics to
constructive overseers, as they can engage with facts rather than speculation.
5
Integration
of Climate and Fiscal Policy: The frequency and intensity of
climate shocks like Ditva are increasing. Sri Lanka's national budget must move
beyond a simple economic forecast to incorporate a Climate-Informed Fiscal Strategy. This
means budgeting for climate risks, integrating climate-resilient standards into
all public investment projects, and using the budget process to drive green
growth.
6 Strengthening Parliamentary Oversight: The interim budget process, by its nature, often bypasses the detailed scrutiny of the main budget. The Parliament, and particularly the Committee on Public Finance, must be empowered to conduct an accelerated, yet thorough, review of the interim budget's allocations and implementation. Strong parliamentary oversight of climate finance and disaster spending is a global best practice that ensures funds are aligned with national priorities and international commitments [6].
In conclusion, the Rs. 500 billion interim budget is a necessary, well-intentioned response to a national tragedy. However, its presentation serves as a stark reminder that while Sri Lanka may have navigated the worst of the 2022 economic storm, it remains highly vulnerable to external shocks, both economic and climatic. The true measure of the NPP government's success will not be the speed of the allocation, but the efficiency, transparency, and long-term resilience built into the expenditure. By institutionalising proactive disaster risk financing, enforcing conditional budgeting, and maintaining unwavering fiscal discipline, Sri Lanka can ensure that the interim budget is a bridge to a more resilient future, rather than another step in the cycle of fiscal discontinuity.
[1] International Monetary Fund. (2025). Sri Lanka's Sovereign Debt Restructuring. IMF eLibrary. [URL: https://www.elibrary.imf.org/view/journals/001/2025/175/article-A001-en.pdf]
[2] International Monetary Fund. (2025). Technical Assistance Report-Preparing a Fiscal Risk
Statement. IMF eLibrary. [URL: https://www.elibrary.imf.org/view/journals/019/2025/085/article-A001-en.xml]
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