Disaster Aid or Debt Trap? Sri Lanka’s IMF Gamble

The Disbursement of US$ 200 million in response to Sri Lanka’s   appeal for IMF emergency financing in the aftermath of Cyclone Ditwah  with the approval of  the IMF  executive board highlights a deeper policy dilemma: whether speed should trump cost in managing disaster recovery.

The Government insists that the Rapid Financing Instrument (RFI) is essential to ease immediate foreign exchange pressures. Yet economists caution that the country may be locking itself into an expensive solution when cheaper, less risky options remain available.

At the centre of the debate is the changing nature of IMF lending. Once considered a low-cost safety net, IMF credit has become significantly more expensive for heavily indebted countries. Factoring in SDR-linked interest rates, exchange rate depreciation, and time-based surcharges, analysts estimate that Sri Lanka’s RFI borrowing could carry double-digit costs in local currency terms.

This matters because Sri Lanka is still restructuring billions of dollars in external debt. Adding high-cost emergency loans even relatively small ones could complicate negotiations with creditors and weaken fiscal credibility. Critics argue that disaster financing should reduce long-term vulnerability, not quietly add to it.

Verité Research has pointed out that domestic markets may already be offering cheaper solutions. Sri Lankan banks attract US dollar deposits at around 5%, signalling investor confidence and unused capacity. A targeted domestic dollar bond for cyclone recovery could mobilise these funds transparently while keeping interest costs below IMF-adjusted rates.

Another underexplored avenue is concessional and grant-based financing. Global development banks and climate-focused funds routinely provide disaster assistance, especially to countries facing climate-related shocks. Sri Lanka’s vulnerability to extreme weather strengthens its case for grants rather than loans yet this route requires diplomatic coordination and strategic patience.

The Government argues that the RFI is justified under IMF rules and does not disrupt the ongoing reform programme. However, the timing has raised eyebrows. The emergency request comes just as a larger EFF disbursement has been delayed due to revised fiscal estimates linked to cyclone spending. Critics fear that reliance on IMF stopgap funding could mask deeper fiscal planning weaknesses.

Supporters counter that emergencies demand swift action and that IMF backing reassures markets. Still, economists warn that credibility built on costly borrowing is fragile. With recovery spending expected to roll out gradually, Sri Lanka arguably has time to design smarter financing structures that balance urgency with affordability.

Ultimately, the cyclone has exposed not only infrastructure weaknesses but also gaps in disaster financing strategy. Whether Sri Lanka emerges more resilient or more indebted will depend on choices made now, under pressure but with lasting consequences.