Global climate data points to an emerging El Niño phase that could peak between Q4 2026 and early 2027, with cascading effects on agriculture, energy supply and Sri Lanka’s import bill.
A Climate Cycle With Economic Consequences
A new El Niño phase is taking shape in 2026. Global climate monitoring data shows the Oceanic Niño Index (ONI) is moving into positive territory, with the cycle expected to strengthen through the second half of the year and reach peak intensity between the fourth quarter of 2026 and early 2027.
For Sri Lanka, this is not an abstract climate event. The last comparable episode, which ran through 2015 and 2016, left a measurable trail across agriculture, energy, inflation and government finances. Early indicators suggest the 2026 cycle carries similar characteristics, raising questions that matter directly to businesses, importers, farmers and policymakers.
What El Niño Does to Sri Lanka’s Weather
El Niño weakens the easterly trade winds that drive Asia’s monsoon system. Warm Pacific waters shift eastward, reducing rainfall across South and Southeast Asia while increasing precipitation elsewhere.
During the 2015-2016 event, Sri Lanka experienced highly volatile rainfall patterns. Inland agricultural zones bore the worst of it. Anuradhapura recorded rainfall deficits exceeding 90% below the monthly mean during January of both 2015 and 2016. The negative anomalies persisted well beyond the event itself, prolonging water stress on farmland and reservoir levels. Coastal regions such as Colombo recorded milder but still significant deficits across multiple months.
The pattern that emerges from historical data is consistent: larger rainfall anomalies coincide with or immediately follow El Niño periods.
Agriculture Takes the First Hit
Sri Lanka’s paddy cultivation is the most direct casualty of an El Niño weather cycle. During 2015 to 2017, paddy production fell approximately 50% from peak levels. Both sown and harvested areas contracted sharply as water availability dropped across key growing regions.
The supply shortfall triggered a rise in rice imports to compensate for domestic output losses, adding pressure to the trade account at a time when export earnings from agriculture were also weakening under adverse growing conditions.
A comparable decline in agricultural output in 2026 would put upward pressure on domestic food prices, increase dependence on food imports and reduce foreign exchange earnings from agri-based exports simultaneously.
Energy Costs Follow, With a Lag
The energy sector faces a different but connected pressure. Sri Lanka’s power grid relies significantly on hydroelectric generation. When reservoir levels fall due to reduced rainfall, hydro output contracts and the Ceylon Electricity Board increases reliance on thermal generation, primarily diesel-fired plants.
Historical data from the 2015-2016 cycle shows that diesel import volumes rose sharply in the period following peak El Niño conditions, with thermal reliance peaking one to two years after the event. This lag means energy cost pressures from a 2026 El Niño would likely build through 2027 and into 2028, compounding an already elevated import bill.
For businesses that rely on uninterrupted power or operate in energy-intensive sectors, this represents a material cost risk in the medium term.
The Trade Balance Feels It Sequentially
The trade balance deterioration during an El Niño cycle does not happen all at once. It follows a sequence.
First, agricultural export earnings weaken as output falls. Then, food import volumes rise to cover domestic shortfalls. Finally, fuel imports increase as thermal energy generation expands to replace lost hydro capacity. Each of these pressures builds on the previous one, and the combined effect on the trade balance typically peaks with a lag that extends beyond the El Niño event period itself.
During the 2015-2016 cycle, trade balance deterioration persisted into 2017 and 2018, driven partly by elevated fuel import costs even after the climate conditions had eased.
Inflation: The Most Visible Consequence
For most Sri Lankan businesses and households, El Niño’s economic impact will be felt most directly through food prices.
During the 2015-2016 episode, Sri Lanka’s headline inflation as measured by the CCPI rose from approximately 2% to around 8% over a 24-month period. The increase was driven primarily by food price pressures rather than fuel costs, which remained relatively contained during that cycle.
Two scenarios are worth considering for 2026. Under a moderate El Niño, food inflation could rise between 5% and 7% year-on-year during late 2026 into 2027, with pressures persisting for 12 to 18 months. Under a severe scenario comparable to 2015-2016, food inflation could reach 10% to 12% year-on-year, with fuel-related inflation adding a further 2% to 3% in 2027 to 2028, and total pressure lasting up to 24 months.
The inflation risk is asymmetric. The upside is significant. The downside is limited.
What Monetary Policy Did Last Time
When food inflation pushed CCPI higher during 2015-2016, the Central Bank of Sri Lanka responded by raising policy rates by 100 to 125 basis points. The tightening cycle constrained monetary easing even as inflation began to moderate toward end-2017, because fuel-driven secondary pressures resurfaced and kept the rate environment tight.
A comparable inflation trajectory in 2026-2027 would place the CBSL in a similar position, potentially limiting the room for further rate cuts at a time when the economy is still consolidating its recovery from the 2022 crisis.
What Businesses Should Watch
The El Niño 2026 cycle is an emerging risk, not a confirmed catastrophe. Its severity will become clearer through the second half of 2026 as ONI readings firm up. However, the historical precedent is clear enough to warrant early attention from businesses across agriculture, food retail, logistics, energy-intensive manufacturing and financial services.
Companies with exposure to agri-input costs, food commodity procurement or USD-denominated import contracts should factor the possibility of elevated food inflation and a wider trade deficit into their planning for 2027.
Key Numbers
| Indicator | 2015-2016 Actual | 2026 Moderate Scenario | 2026 Severe Scenario |
|---|---|---|---|
| Paddy production decline | ~50% from peak | Comparable risk | Comparable risk |
| CCPI increase over 24 months | ~2% to 8% | 5-7% food inflation YoY | 10-12% food inflation YoY |
| Fuel-related inflation | Limited | Not projected | +2-3% in 2027-2028 |
| Impact duration | ~24 months | 12-18 months | ~24 months |
| CBSL rate response (2015-16) | +100-125 bps | Policy risk if repeated | Policy risk if repeated |
| Trade balance deterioration | Extended into 2017-18 | Sequential pressure expected | Amplified sequential pressure |
Business Impact
Importers and food retailers face the most immediate exposure. If domestic food supply contracts and import volumes rise, procurement costs increase and margin pressure follows.
Exporters of agricultural products including tea, rubber and coconut risk lower volumes and reduced earnings if growing conditions deteriorate in key producing regions.
Energy-intensive manufacturers should factor in a potential increase in electricity tariffs if thermal generation costs rise and the CEB is required to pass through higher fuel costs.
Banks and financial institutions with exposure to agri-lending, microfinance and SME books in rural areas should monitor early signs of repayment stress, which historically materializes 12 to 18 months after an El Niño peak.
Treasury and finance teams should note that a tightening bias at the CBSL, triggered by food-driven inflation, could affect the interest rate environment through 2027.
Source Attribution
Source: Central Bank of Sri Lanka (CBSL) statistical data, Department of Meteorology Sri Lanka, NOAA Climate Prediction Center, World Bank Climate Change Knowledge Portal, Department of Census and Statistics Sri Lanka. Climate projections referenced in this article are based on publicly available data and historical precedent. This article does not constitute financial or investment advice.