After the storm: A policy blueprint to protect MSMEs from climate shocks

Traders busy restoring their stores impacted by the Cyclone Ditwah in the Central Province - Pic by Shehan Gunasekera

“Why safeguarding micro, small and medium enterprises after Cyclone Ditwah is essential for economic recovery and long-term resilience”

When Cyclone Ditwah swept across Sri Lanka with days of torrential rain, floods and landslides, the first focus—rightly—was on saving lives. With over 350 deaths, nearly 400 missing, and over 1 million people affected, the country is in the grip of one of its worst disasters in years. 

But once the waters recede and media attention moves on, another crisis will remain: the quiet, grinding collapse of thousands of micro, small and medium enterprises (MSMEs) that form the backbone of Sri Lanka’s economy.

MSMEs account for more than 90% of all enterprises in Sri Lanka, contribute around 52% to GDP and provide roughly 45% of employment. Yet this same sector has already been hammered by a series of shocks: the COVID-19 pandemic, the 2022–23 economic crisis, high inflation and interest rates, and a sluggish global environment for exports. Cyclone Ditwah and the associated flooding now threaten to push many of these businesses beyond recovery.

In this context, the key question for Government and policymakers is clear: What must Sri Lanka do—quickly and strategically—to keep MSMEs alive, help them recover, and make them resilient to future climate disasters?

1. Why MSMEs matter for disaster recovery

The importance of MSMEs is already well recognised in national policy. The National SME Policy Framework describes SMEs as the “backbone” of the economy in terms of employment, regional development and inclusive growth. Central Bank reports and recent studies also emphasise that MSMEs are critical for innovation, supply-chain linkages and as breeding grounds for future large firms.

In a post-disaster setting, MSMEs play several additional roles:

• Restoring livelihoods quickly: Most daily-wage earners, self-employed workers, and informal sector workers depend directly on micro and small businesses.
• Rebuilding local economies: MSMEs in retail, services, transport, tourism and small-scale manufacturing reconnect local markets and communities far faster than large, centralised enterprises.
• Supporting social stability: When MSMEs collapse, unemployment, indebtedness and migration pressures increase—fuel for social unrest and long-term poverty.

For a country already navigating a difficult IMF-supported stabilisation path, letting MSMEs fail after this disaster would undermine both economic recovery and social cohesion.

If Sri Lanka fails to act decisively, the human and economic losses from this disaster will continue to compound long after the floodwaters have receded. But if policymakers seize this moment to protect and empower MSMEs, the country can convert a period of tragedy into a turning point—towards a more resilient, inclusive and climate-ready economy.

2. The specific vulnerabilities of MSMEs in this disaster

Most MSMEs in Sri Lanka entered this climate crisis already weakened. Surveys during and after COVID-19 showed sharp revenue falls, depleted savings, and limited access to formal finance for MSMEs. The subsequent economic crisis intensified these pressures through currency depreciation, high interest rates and supply disruptions.

Cyclone Ditwah and the heavy rains have exposed several structural vulnerabilities:

1.Physical damage to assets and stocks

Many micro and small firms operate from low-lying areas—near rivers, roadsides and dense urban settlements. Floods destroy machinery, inventory, vehicles and business premises. Few of these enterprises carry comprehensive insurance, and even fewer have digital backups of records or data.

2.Cash-flow collapse and liquidity stress

When a business cannot operate for weeks, fixed costs continue: rent, electricity (where still payable), loan instalments and staff wages. For MSMEs already servicing high-interest loans, even short interruptions can tip them into default.

3.Limited insurance and risk-pooling mechanisms

Although Sri Lanka has a legal framework for disaster management and compensation under the Disaster Management Act No.13 of 2005, existing schemes focus more on households and infrastructure than on small businesses. Compensation ceilings for destroyed houses are modest, and there is no comprehensive nationwide mechanism specifically tailored for MSME asset losses.

4.Debt overhang from previous crises

Many MSMEs took on additional borrowing during COVID-19 and the 2022–23 crisis, often through emergency facilities or informal lenders. These legacy debts now limit their capacity to borrow again for reconstruction.

5.High informality and weak documentation

A large share of micro-enterprises operate informally or semi-formally, without proper registration, financial statements or tax files. This makes them invisible to formal relief programmes, bank lending schemes, and even Government data systems.

Given these vulnerabilities, “business as usual” policy responses will not be enough. Sri Lanka needs a targeted, three-phase package for MSMEs: emergency relief, recovery finance, and long-term resilience.

3. Phase One – Immediate relief: Keeping MSMEs alive

3.1 Rapid, targeted grant support

The first priority is to prevent viable MSMEs from closing permanently in the next three to six months.

• Government, through the Treasury and relevant ministries, should design emergency grant schemes for MSMEs in officially declared disaster-hit divisions. These could be simple lump-sum payments based on business size (micro, small, medium) and verified location, administered via Divisional Secretariats with Chamber and local authority support.
• Grants should be unconditional but accountable: beneficiaries must declare basic data (sector, employment, prior turnover) to help build a comprehensive MSME database for future policy design.

International partners—such as the ADB, World Bank, UN agencies and bilateral donors—can co-finance such grants, aligning them with ongoing private-sector and climate-resilience programmes. 

3.2 Temporary tax relief and administrative easement

The tax system can be a powerful shock absorber if used intelligently:

• Deferral of tax payments (income tax, VAT, withholding taxes and turnover-based levies) for affected MSMEs for a defined period (e.g., 6–12 months), with clear criteria and cut-off dates.
• Waiver of penalties and interest on late filings and payments for businesses in disaster-declared areas.
• Fast-tracking of VAT refunds and other legitimate tax credits, particularly for export-oriented MSMEs facing working-capital constraints.
• Simplified “post-disaster tax help desks” within the Inland Revenue Department (IRD) and at regional offices to guide MSMEs on available relief, documentation and compliance.

Such measures would not permanently reduce the tax base but would give breathing space to businesses and protect future revenue streams.

Sri Lanka is once again reminded that climate disasters are not temporary interruptions—they are a permanent feature of our economic landscape. For a country where MSMEs form the lifeblood of local economies, employment and social stability, their collapse would deepen national vulnerability and reverse the hard-won gains of recent stabilisation efforts. This moment demands more than short-term relief; it calls for a decisive national commitment to rebuild, protect and future-proof the MSME sector

3.3 Moratoriums and regulatory flexibility from the financial sector

The Central Bank and the banking sector have previously introduced moratoriums and special credit lines during COVID-19 and the economic crisis. A similar—but better targeted—approach is needed now:

• Short-term moratoriums on principal (and in some cases interest) for MSMEs directly impacted by the floods and landslides, with clear eligibility criteria and timeframes.
• Regulatory forbearance allowing banks to avoid automatic downgrading of restructured MSME loans purely due to this disaster, while maintaining prudent risk management.
• Encouraging licensed finance companies and micro-finance institutions to restructure loans for affected clients, backed by partial credit-guarantee schemes from the Government.

These measures would prevent a wave of defaults and preserve the financial system’s willingness to lend to MSMEs during the recovery phase.

4. Phase Two – Recovery: Financing reconstruction and adaptation

Once immediate survival is secured, MSMEs need support to rebuild better, not simply return to their previous vulnerable state.

4.1 Concessional “build-back-better” credit lines

Government, in partnership with development partners and state banks, should introduce dedicated concessional credit lines for MSMEs in affected regions, with features such as:

• Below-market interest rates and longer tenors to finance replacement of machinery, rehabilitation of premises, and replenishment of stock.
• Grace periods on repayment that align with realistic business recovery cycles.
• Blended finance structures where part of the assistance is a grant (e.g., for climate-resilient upgrades) and part is a loan.

Priority could be given to investments that reduce future risk—such as relocating facilities away from high-risk zones, adopting flood-resistant construction, or investing in renewable energy systems that also lower operating costs.

4.2 Public procurement as a recovery tool

Government is the largest single buyer in the domestic economy. It can use procurement to channel demand toward affected MSMEs:

• Introduce temporary procurement preferences or quotas for MSMEs located in disaster-hit divisions, especially in sectors such as construction, supplies for schools and hospitals, and maintenance works.
• Simplify bidding processes and reduce documentation burdens for small suppliers while maintaining transparency and anti-corruption safeguards.

This approach simultaneously accelerates infrastructure repair and injects revenue directly into affected local economies.

4.3 Business development, advisory and digitalisation support

Finance alone is insufficient. MSMEs also need knowledge and networks:

• Agencies such as the Industrial Development Board (IDB), Export Development Board (EDB) and regional Chambers should provide business continuity and recovery advisory services, helping firms reassess markets, revise business models, and manage cash flows.
• Digitalisation support—training and small grants for e-commerce, online marketing, cloud-based accounting and remote work tools—can help MSMEs reach customers even during disruptions and build better record-keeping for future support programmes.

5. Phase Three – Building long-term climate resilience into MSME policy

Climate-related disasters are no longer isolated events; they are part of the “new normal”. Sri Lanka already has a Disaster Management Act and a National Policy on Disaster Management, which call for comprehensive planning across all ministries and agencies. However, MSMEs have not been at the centre of this framework.

A forward-looking strategy should include:

5.1 Integrating MSMEs into national disaster-risk planning

• Make MSME resilience an explicit objective in the next revision of the National SME Policy and related sectoral strategies.
• Require line ministries, provincial councils and local authorities to map MSME clusters in their areas and integrate them into Disaster Management Plans, as required under the Act. 
• Conduct regular risk-awareness and preparedness programmes for MSMEs, including evacuation planning, supply-chain diversification and data backup practices.

5.2 Developing affordable insurance and risk-sharing mechanisms

Traditional insurance products are often too complex or expensive for micro and small enterprises. Sri Lanka can explore:

• Index-based or parametric insurance products linked to rainfall or river levels, which provide automatic payouts after defined thresholds are crossed.
• Group insurance schemes for MSME clusters, cooperatives or associations to lower premiums and administrative costs.
• Limited, targeted premium subsidies for the most vulnerable segments during an initial adoption phase, funded from climate-finance windows and disaster-risk-reduction budgets.

Sri Lanka can convert this crisis into a platform for renewal. If policymakers act with urgency, coordination and vision, the MSME sector can emerge not only restored, but stronger, greener and better equipped to withstand the storms of the future—ensuring that national recovery is both inclusive and sustainable

5.3 Promoting green and climate-resilient MSME investment

The next phase of Sri Lanka’s growth must be both climate-smart and inclusive:

• Offer tax incentives or accelerated depreciation for investments in energy-efficient machinery, rooftop solar, water-saving technologies and climate-resilient infrastructure for MSMEs.
• Encourage banks to create “green MSME” loan products, supported by concessional refinance lines or guarantees linked to global climate-finance facilities.
• Link MSME support with national initiatives on renewable energy, circular economy, sustainable agriculture and eco-tourism, ensuring small firms are not left out of the green transition.

5.4 Strengthening data, coordination and accountability

Effective policy requires good information and coordination:

• Build a centralised MSME registry that integrates data from the IRD, Registrar of Companies, provincial councils, local authorities and sectoral agencies. This would allow rapid identification of affected firms after disasters and targeted support with minimal leakages.
• Establish a multi-stakeholder council on MSME resilience, including the Ministry of Finance, Ministry of Industry, CBSL, DMC, chambers of commerce, women’s business associations and MSME representatives.
• Ensure transparency and public reporting on all MSME-related relief and recovery measures, with geo-tagged data on beneficiaries and a clear grievance-redress mechanism to maintain public trust.

6. Protecting the most vulnerable within the MSME ecosystem

Any MSME strategy must pay particular attention to:

• Women-owned and youth-owned enterprises, which often operate with thinner capital buffers and face more barriers in accessing finance and networks.
• Informal micro-enterprises in urban poor settlements and rural villages, whose survival is essential for community wellbeing, even if they are not formally registered.
• nWorkers in MSMEs, many of whom lack formal contracts and social protection.

Government can link MSME relief measures with broader reforms in social protection—such as better targeting under programmes like Aswasuma—to ensure self-employed and micro-enterprise workers are not excluded from basic safety nets in future disasters.

7. A call for a “disaster-resilient enterprise compact”

Sri Lanka stands at a crossroads. Cyclone Ditwah has exposed not only physical vulnerabilities in infrastructure and settlements, but also institutional and economic vulnerabilities in the way we support our smallest businesses.

What is needed now is a “disaster-resilient enterprise compact”—a clear, time-bound agreement between Government, the financial sector, development partners, and the business community to:

• Provide rapid, targeted relief to MSMEs in the worst-affected areas.
• Mobilise patient recovery finance that allows firms to rebuild stronger and greener.
• Embed climate resilience at the heart of MSME policy, planning and regulation.

If Sri Lanka fails to act decisively, the human and economic losses from this disaster will continue to compound long after the floodwaters have receded. But if policymakers seize this moment to protect and empower MSMEs, the country can convert a period of tragedy into a turning point—towards a more resilient, inclusive and climate-ready economy.

Sri Lanka is once again reminded that climate disasters are not temporary interruptions—they are a permanent feature of our economic landscape. For a country where MSMEs form the lifeblood of local economies, employment and social stability, their collapse would deepen national vulnerability and reverse the hard-won gains of recent stabilisation efforts. This moment demands more than short-term relief; it calls for a decisive national commitment to rebuild, protect and future-proof the MSME sector. By combining rapid financial support, smart tax and regulatory easing, targeted recovery financing, and a long-term resilience agenda rooted in climate adaptation and digital transformation, Sri Lanka can convert this crisis into a platform for renewal. If policymakers act with urgency, coordination and vision, the MSME sector can emerge not only restored, but stronger, greener and better equipped to withstand the storms of the future—ensuring that national recovery is both inclusive and sustainable.

(The writer holds an MBA (UK), FCA (SL), FCMA (UK), FCPA (Aust.), CMA (Aust.), FCMA (SL), MCPM (SL), CGMA (GLOBAL) and is Chartered Accountant, Tax and Management Consultant. He can be reached via: [email protected]/www.agsarma.com.)