Climate economics and Sri Lanka: From managing disasters to protecting national economy

Overview

The growing impact on Climate changes is painting an increasingly unpleasant picture for Sri Lanka. The country’s depressed recent experience of devastating floods, landslides, and elongated drought for certain areas alarms the rising significance of climate management not only in safeguarding lives and properties but also certifying the resilience of economic sustainability and uninterrupted economic development after severe economic depression. Therefore, the contrast between destructive floods and unendurable drought raises food for thought for all of us; are we managing climate related risks strategically? Or are we permitting amassed economic consequences to grow until nationally unbearable? 

From an economist’s perspective, climate change cannot be viewed merely as an environmental issue. Instead, it is a blend of resource allocation and utilisation, public financing, investments, employment, productivity, long -term economic sustainability and living standards. Undoubtedly, it demands updated scientific knowledge with technology adaptation, deliberate fiscal policy attention, institutional coordination and dedicated execution of duties and responsible citizenship. Sri Lanka has to establish a proactive climate management approach backed by climate economics fundamentals in addition to post disaster management to defend lives, infrastructure and avoid massive economic losses.  

Climate changes and vulnerability of a developing economy after severe depression

Sri Lanka’s latest experiences during the last twelve months demonstrate economic loss and possible risks associated. EconomyNext (2026, October 12) highlights the alarming nature of Sri Lanka’s rising frequency and seriousness of extreme climate endeavors and the potential impact to its financial steadiness. Accordingly, Cyclone Ditwah affected all districts and accounted for direct physical damage of USD 4.1 billion equivalent to approximately 4% of Sri Lanka’s GDP as per the findings of World Bank’s Global Rapid Post-Disaster Damage Estimation (GRADE) assessment. Nevertheless, the overall cost estimation exceeds 4% of the GDP as the economic cost is more broadly determined than the direct financial cost. World Bank Group (2025) distinctly revealed that climate changes cause significant economic losses to Sri Lanka, ranging from 3.3 to 3.5 percent of GDP while broadening the poverty rates especially among agricultural and coastal area communities.  In addition, the collision due to severe drought reported in September -October 2026 in various parts of Sri Lanka have witnessed the economic vulnerability of agricultural income, rural ecosystem and water-based livelihood etc. Destroyed economic infrastructure such as roads, railway tracks and tourism attractions not only delayed economic growth but also prevented potential production and foreign income sources. Public spending on disaster budgets to replace capital instead of fresh capital acquisition doubles the expenditure with significant opportunity cost to the nation.

Climate economics is a national priority

Climate economics demonstrates the significance of examining climate change risks in economic decision making. Understanding the cost of environmental hazards, incentivising individuals and businesses to ensure optimisation of resource utilisation and taking opportunity cost as a key determinant of cost -benefit analysis are core elements of this discipline. Climate economics has been observed among developed nations as one of the secrets behind their economic prosperity.

A. Carbon tax and incentives for businesses – The purpose of the carbon tax is to redefine business cost and to rethink energy cost. Incentive schemes are introduced to promote decarbonisation to enjoy reduced business costs and align with sustainability goals.

B. Smart agriculture for climate changes – Structural move from conventional agriculture to technology based to uncover imminent climate changes, crop substitution and harvesting time determination, act as an early warning system and insurance etc.

C. Long -term investment in climate risk resilience programs such as redesigned drainage systems, river basin management, city planning, infrastructure such as purposive tunnels to divert water among regions and coastal safeguard programs.

AI based climate economics and predictive analytics reshaped the ecosystem to enhance early preparedness to avoid possible financial and social risks and to alter strategies to manage the expected climate change and post consequences. Renewable energy generation has become the comparative advantage for many economies to reserve global competitiveness during unstable global oil prices. Emerging circular economic practices open doors for new industrialised commodities to deviate from conventional consumption to responsible and sustainable consumption, who think of the upcoming population in the world. Repair, re-use, remanufacturing and recycling have not only been considered as legalised production strategies but also consumption protocols of a modern responsible citizenship. Climate economics emphasises due attention to nature-based solutions to accept natural drainage flow via wetlands, watersheds and mangroves, forests and coastal ecosystems etc. as unplanned human activities made avoidable climate risks unavoidable.

Why climate economics for Sri Lanka?

Undoubtedly, the time has come for Sri Lanka to adopt a climate economics perspective, as the progressively alarming effects of climate change in recent years underscore the urgent need for effective adaptation strategies and economically sustainable solutions. The section below discusses possible applications for Sri Lanka to experience as author’s opinions.

a. Climate changes - risk assessment and disaster prevention

A scientifically validated model for climate risk assessment should be developed to estimate potential economic losses arising from dynamic environmental changes of varying magnitudes. Although existing forecasting systems monitor rainfall volumes, river water levels and the geographical extent of potential flooding, these assessments should be complemented by a comprehensive evaluation of the associated economic costs. Integrating economic indicators into climate risk assessment would provide a clearer understanding of the scale and severity of potential impacts. Such an integrated approach would enable policymakers to identify the most vulnerable communities and economic activities, anticipate potential barriers to adaptation, strengthen early warning systems, and formulate effective short-, medium- and long-term strategies to mitigate climate-related risks and minimise economic losses.

b. Agricultural productivity and food price inflation

Agriculture remains particularly vulnerable to climate change due to its inherent dependence on weather and environmental conditions. However, the lack of digitally enabled climate forecasting mechanisms, inadequate alignment of cultivation practices with anticipated climatic changes, and persistent inefficiencies across the agricultural supply chain contribute to rising food prices and food price inflation. In many instances, the economic costs of climate-related disruptions are ultimately transferred to consumers through higher prices, while certain intermediaries may exploit supply shortages and market inefficiencies to earn excessive profits. Therefore, integrating digital climate forecasting, climate-resilient agricultural practices and improved market transparency is essential to protecting farmers’ livelihoods, stabilising food prices and ensuring that the economic burden of climate change is not disproportionately borne by consumers.

c. Irrigation system management and development

Irrigation infrastructure should be recognised as a critical national economic asset rather than being viewed solely as a facility for agricultural production. Strengthening water storage capacity, improving reservoir management, and facilitating the transfer of water from water-surplus regions to water-stressed areas, where geographically and environmentally feasible, could significantly enhance national water security. Furthermore, establishing an integrated digital platform to coordinate all relevant institutions would enable real-time monitoring of reservoir levels, rainfall patterns, water distribution and seasonal climate variations, supporting more effective and timely decision-making. Residents in potentially affected areas should also receive location-specific mobile alerts and early warnings during emergencies, allowing them to take precautionary measures and minimise potential losses. Equally important is the regular maintenance, upgrading and expansion of drainage infrastructure to improve its capacity to manage excess water. Prioritising preventive maintenance and long-term infrastructure planning, rather than relying predominantly on costly rehabilitation after disasters occur, could reduce public expenditure, minimise economic disruption and strengthen the country’s resilience to climate-related risks.

d. Energy economics and transition to renewable energies

Energy costs are a critical determinant of a nation’s economic prosperity, industrial competitiveness and standard of living. Over-reliance on expensive and environmentally unsustainable conventional energy sources can undermine a country’s ability to compete in an increasingly sustainability-driven global economy. Furthermore, disruptions to the national electricity grid and the economic costs associated with unreliable power supplies can constrain production, interrupt business operations and discourage potential foreign direct investment (FDI). In this context, accelerating the transition towards renewable energy sources offers Sri Lanka a strategic opportunity to reduce environmental pollution, strengthen long-term energy security and improve the reliability of electricity supplies. With appropriate investment, technological innovation and effective grid management, large-scale renewable energy development could reduce exposure to volatile fossil fuel prices, lower long-term energy costs and support improved living standards. From a climate economics perspective, renewable energy should therefore be considered not merely an environmental initiative, but a strategic investment in national productivity, economic resilience and sustainable development.

e. Climate changes and Fiscal policy directions

From a fiscal policy perspective, the economic costs of climate change and the public expenditure incurred on post-disaster rehabilitation can place a substantial burden on national budgets. Therefore, fiscal allocations for climate adaptation and disaster management should be strategically aligned with proactive risk-reduction measures and preventive interventions. Rather than focusing predominantly on relief and rehabilitation after disasters occur, governments should assess the costs and benefits of preventive investments through scientifically grounded cost–benefit analyses and evaluations of public expenditure returns. Such assessments would help identify initiatives that deliver the greatest economic and social benefits relative to their costs. Furthermore, the responsibilities of provincial councils, municipal councils and other local authorities should be linked to clearly defined key performance indicators (KPIs) that measure their effectiveness in climate risk management, environmental protection and public infrastructure maintenance. The effective utilisation of public funds, including revenue generated through rates, taxes and service fees, should be accompanied by transparent financial management and measurable outcomes. Routine canal cleaning, effective solid waste management, the identification and mapping of climate-vulnerable areas, and comprehensive risk assessments before granting building approvals should become integral components of local governance. Development activities in flood-prone areas and other locations exposed to climate-related hazards must be evaluated against scientifically established risk criteria. Embedding these responsibilities within a climate economics framework would enable Sri Lanka to allocate scarce public resources more efficiently, minimise avoidable economic losses and strengthen long-term fiscal sustainability.

f. Banking and insurance sector financial stability

Macroeconomic stability must remain a central consideration in national strategies to address climate-related risks and environmental disasters. The consequences of major climate events extend far beyond immediate physical damage, potentially creating widespread economic and financial disruptions that undermine the resilience of the entire economy. Although insurance mechanisms play a vital role in disaster recovery, large-scale claims and concentrated losses can place considerable pressure on insurers and the wider financial system. Similarly, delays in loan repayments to banks and finance companies, defaults on outstanding debt, and the eventual write-off of unrecoverable loans can weaken financial institutions and threaten financial stability. When entire communities or geographical areas are severely affected, the resulting loss of livelihoods, productive assets and repayment capacity can create interconnected risks across households, businesses and financial institutions. Such developments may prolong economic recovery and deepen the financial hardship experienced by affected communities. Therefore, climate economics must be understood not merely as an approach to environmental protection, but as an essential component of macroeconomic risk management. Integrating climate risk assessments into fiscal planning, financial regulation, insurance frameworks and credit-risk management would help Sri Lanka anticipate potential shocks, safeguard financial stability and protect livelihoods against the far-reaching economic consequences of climate change.

g. Circular economy, tourism and coastal zone protection

The fundamentals of circular economic practices have long been embedded in Sri Lanka’s traditional way of life. Practices such as reusing resources, minimising waste, sharing resources and living in harmony with nature reflect principles that are now widely recognised within the circular economy framework. However, some of these traditional practices have gradually diminished as convenience-driven consumption patterns have become more prevalent. Reintroducing these principles requires more than rules and regulations; it demands responsible citizenship cultivated through formal education, public awareness campaigns and the strategic use of social media to encourage meaningful behavioral change.

Government support can transform these challenges into opportunities for meaningful change. For Sri Lanka, the time has come to recognise that adopting the principles of climate economics and investing in proactive risk mitigation are far more beneficial than relying predominantly on reactive disaster management. Ultimately, economic development should not be measured solely by financial growth or infrastructure expansion, but also by the extent to which it safeguards human lives, protects livelihoods and secures the well-being of future generations.

Human life must remain at the heart of economic decision-making, and climate resilience must become an integral part of Sri Lanka’s national development agenda.

(The author is Head, School of Business, National Institute of Business Management)

Sources:

EconomyNext. (2026, October 12). Sri Lanka Central Bank warns of possible financial instability from climate impacts. https://economynext.com/sri-lanka-central-bank-warns-of-possible-financial-instability-from-climate-impacts-286280/

World Bank Group. 2025. Sri Lanka Country Climate and Development Report. CCDR Series. © World Bank. http://hdl.handle.net/10986/43995 License: CC BY-NC-ND 3.0 IGO.”