Could El Niño become an FX risk for Sri Lanka?

• A few practical questions for consideration

The Government's decision to appoint a Special Ministerial Sub-Committee and an Officers' Committee to study and respond to the possible impact of El Niño is timely and welcome.

Sri Lanka has already paid a very heavy price for foreign exchange vulnerability. We have seen how quickly an external shock can move through the economy and affect fuel, electricity, food, industry, prices, confidence, and daily life.

While El Niño is mainly discussed as a climate issue, I respectfully believe it may also need to be examined as a possible foreign exchange risk.

I write this not as a climate scientist, economist, or legal expert. I write as a Sri Lankan entrepreneur who is deeply concerned about one recurring national weakness: whenever foreign exchange outflows rise faster than our ability to earn, save, or attract foreign exchange, the whole country becomes vulnerable.

These thoughts are placed only as practical questions for consideration by the relevant committees and authorities, if such matters have not already been examined.

From weather risk to FX risk

El Niño may or may not affect Sri Lanka severely. That judgement must be made by the relevant experts.

However, if it reduces rainfall in key catchment areas, affects hydropower generation, damages agricultural output, or increases emergency import needs, the impact may not remain only within the climate sector. It can become an energy issue. It can become a food issue. It can become an inflation issue. And finally, it can become a foreign exchange issue.

When hydropower generation falls, thermal power generation may have to increase, requiring additional fuel or coal imports. When local food production is affected, food imports may rise. When farmers and vulnerable communities suffer losses, the Government may be pushed towards unplanned relief expenditure. Each of these adds pressure to the country's foreign exchange position.

This is why the El Niño response may need to include a foreign exchange resilience lens from the very beginning.

Can the FX exposure be estimated early?

The first practical question is this: if El Niño affects Sri Lanka, what could be the additional foreign exchange burden?

This does not need to be a perfect prediction. Even a scenario-based estimate would be useful. If hydropower generation falls, what could be the additional cost of thermal power? If certain crops are affected, what could be the additional food import requirement? If emergency fertiliser, fuel, or essential imports become necessary, what would be the possible pressure on reserves? If electricity costs rise, what would be the impact on industries that already compete in difficult export markets?

A practical El Niño-linked foreign exchange exposure map, one that connects climate risk with energy imports, food imports, emergency expenditure, industrial costs, and reserve pressure, could help the country prepare before the cost arrives. This is not alarmism. It is disciplined preparation.

Energy and agriculture: the most urgent fronts

Energy may be one of the most urgent areas to examine. Sri Lanka depends significantly on hydropower during normal conditions. If rainfall patterns are disturbed and reservoir levels are affected, the country may need to rely more heavily on thermal power, which means higher foreign exchange outflows.

The question worth asking is whether Sri Lanka can study any limited, affordable, weather-linked financial protection for the most serious energy-related risk. Some countries have used weather-linked financial instruments to reduce the financial impact of drought and high energy costs. Sri Lanka should not blindly copy any model. Our conditions are different. But the principle may be worth studying: could a risk-transfer instrument be linked to rainfall, reservoir inflows, or hydropower generation? Could development partners assist with technical design?

Could concessional climate-risk finance support such a mechanism?

Agriculture deserves equal attention. If rainfall patterns change, farmers may face crop losses or reduced yields. This weakens rural incomes, increases debt pressure, and affects food supply. At that point the issue is no longer only about agriculture. It becomes a food-price issue and an import issue.

Could the most climate-sensitive farming areas be mapped early? Could irrigation, crop planning, insurance, banking, and digital payment systems be coordinated before losses become widespread? Could early farmer support reduce the later need for emergency food imports and Treasury-funded relief?

Other countries, including India, have experience with weather-based crop insurance. Such systems cannot be copied without careful local study. But where possible, measurable weather data can help speed up support and reduce delays. The question for Sri Lanka is not whether to copy another country. It is whether we can design something practical for our own conditions.

Prioritising risks and engaging the private sector

In a resource-constrained country, every risk cannot receive equal attention at the same time. The committee process may benefit from asking: which El Niño-related risks can create the largest additional foreign exchange demand within the shortest time? For Sri Lanka, the most urgent areas are likely energy, food, and essential imports. Early attention should therefore be directed there first.

This is similar to how a responsible business prepares for a cash-flow shock. A good business does not wait until its bank balance is exhausted. It asks early where cash flow can be damaged, which payments are unavoidable, and what risks can be reduced. A country's foreign exchange position deserves the same discipline.

The private sector should not wait only for Government action. Industries that depend on electricity, imported raw materials, agriculture, logistics, cold storage, tourism, and consumer demand may all be affected in different ways by a severe weather event. If clear early guidance is given, businesses can review energy use, import timing, stock levels, local sourcing possibilities, and production schedules.

None of these actions alone will solve a national problem. But thousands of timely private decisions can reduce avoidable pressure on the wider economy. National resilience is not built only by committees. It is also built by businesses, farmers, banks, insurers, public institutions, and households acting early.

Connecting the dots across ministries

A climate shock does not respect ministry boundaries, and the response cannot remain inside narrow institutional limits. The Ministry of Energy, Ceylon Electricity Board, Ministry of Agriculture, Treasury, Central Bank, Department of Meteorology, irrigation authorities, insurance professionals, development partners, and private sector representatives may each hold part of the answer. The real value will come from connecting these parts early.

The objective should not be to produce a long report after the event. The objective should be to identify practical safeguards before avoidable costs fall on the country.

The central question

Sri Lanka does not need fear-driven policy. Nor does it need grand theories that take years to produce results. What it needs is practical, early, coordinated preparation.

The appointment of the committees is an important first step. My humble hope is that, in addition to the climate, agriculture, irrigation, disaster management, and energy dimensions, the possible foreign exchange dimension will also receive serious attention.

Can Sri Lanka treat El Niño not only as a weather risk, but also as a possible FX-resilience risk? If the answer is yes, the next question matters even more: what practical steps can be studied immediately to reduce additional pressure on foreign exchange reserves before the cost arrives?

For a country that has already suffered the consequences of a foreign exchange crisis, this is not merely an economic debate. It is a national responsibility. Protecting foreign exchange stability affects every household, every business, every farmer, every worker, and every future generation. Sri Lanka must not wait until warning signs become a national emergency.

(The author is a Chartered Engineer, entrepreneur, and Founder/Chairman of the KIK Group of Companies)