When the term El Niño appears in the news, it is generally associated with weather, rainfall and temperature. But for Sri Lanka, an exceptionally strong El Niño can have consequences far beyond meteorology. Its effects can extend through agriculture and food prices to business costs, trade, electricity, water resources, inflation, Government revenue, public expenditure and household purchasing power.
For this reason, El Niño should increasingly be viewed not merely as a climate phenomenon, but as an economic, fiscal and business risk. For Government policymakers, business organisations, traders, taxpayers and households, the key question is not simply how the weather may change, but how climate-related disruptions could affect production, costs, cash flow, trade, taxation and economic stability.
The issue is particularly important in 2026. According to NOAA’s latest assessment issued on 13 August 2026, there is more than a 90% probability of a very strong El Niño during the Northern Hemisphere autumn and winter of 2026-27. NOAA estimates a 69% probability that the October-December 2026 event could reach historic strength, exceeding the strength of previous El Niño events recorded since 1950. Sri Lanka’s Department of Meteorology has also warned of a potentially exceptional event. These warnings deserve attention not only from meteorologists, but also from policymakers, businesses, traders, farmers, banks, insurers, accountants, taxpayers and households.
El Niño is the warm phase of the El Niño-Southern Oscillation (ENSO), a natural climate phenomenon associated with unusually warm sea-surface temperatures in the central and eastern tropical Pacific Ocean. This warming changes atmospheric circulation and can influence rainfall and temperatures in distant parts of the world. However, El Niño does not produce the same effect everywhere. For Sri Lanka, the relationship is particularly complex. Different seasons and regions can experience different outcomes. Therefore, the common statement that ‘El Niño means drought in Sri Lanka’ is too simplistic. The more appropriate concern is greater climate variability and the possibility of extreme weather conditions.
Will 2026 be a strong El Niño year?
Based on the latest forecasts, the probability is increasingly high. NOAA’s latest assessment points to a more than 90% probability of a very strong El Niño during late 2026 and early 2027, with a substantial probability of historic strength during the final quarter of 2026. The Sri Lankan Department of Meteorology has issued a similar warning. The significance of these forecasts is not that Sri Lanka will necessarily experience a particular type of weather, but that the underlying global climate system is entering an unusually strong phase. Therefore, the appropriate response is: Prepare for volatility, rather than predict a single outcome.
‘Super El Niño’ is widely used in media discussions, but it is not a separate formal scientific classification. It is more appropriate to refer to a very strong or historically strong El Niño. More importantly, a very strong El Niño in the Pacific does not mean that Sri Lanka will automatically experience a proportionately severe drought. Sri Lanka’s weather depends on the interaction between the Pacific Ocean, Indian Ocean, monsoon systems and other atmospheric conditions. For businesses, the question should therefore not be: ‘Will there be a Super El Niño?’ It should be: ‘What climate-related risks could affect my business, customers, suppliers and cash flow?’
Why should Sri Lanka’s economy be concerned?
The economic transmission mechanism of an El Niño event can be significant. Changes in rainfall, temperature and weather conditions can affect agricultural production, which may lead to higher food prices and contribute to inflation. Rising food and essential commodity prices can reduce household purchasing power, resulting in lower discretionary spending and weaker business demand. This can, in turn, place pressure on corporate profitability and ultimately affect Government Tax Revenue. At the same time, disruptions to domestic production may increase the need for imports, raising the country’s foreign-exchange requirements and potentially placing additional pressure on the trade balance. Floods, droughts and climate-related damage to infrastructure can further increase Government expenditure on disaster relief, reconstruction, agriculture and essential services. Thus, what begins as a climate event can ultimately develop into a broader macroeconomic, fiscal and business-risk issue for Sri Lanka.
Impact on businesses and trade
Businesses are likely to experience the effects of El Niño through several interconnected channels. Input costs may increase if agricultural products and other commodities become more expensive, putting pressure on production costs and profit margins. Supply chains may also be disrupted by extreme weather, affecting suppliers, transportation, logistics and delivery schedules. Changes in rainfall and higher temperatures can influence electricity demand and hydropower availability, while water-intensive industries may face increased water-related operating risks. At the same time, if food and other essential expenses rise, households may reduce discretionary spending, leading to weaker consumer demand for non-essential goods and services. Businesses may also face greater working-capital requirements as inventory costs increase, customer payments are delayed and operating expenses rise.
In this environment, businesses should undertake an ‘El Niño Stress Test’ as part of their risk-management and business-continuity planning. Management should assess what would happen if input costs increased by 10-20%, sales temporarily declined, a key supplier was unable to deliver for two weeks, transportation was disrupted, electricity costs increased, or customers took longer to settle their outstanding balances. The objective is not to predict the exact impact of El Niño, but to understand the business’s ability to withstand different scenarios and maintain operations. The results should be incorporated into the company’s cash-flow forecasts, working-capital planning, procurement strategy and overall Business Continuity Plan.
MSMEs: The most vulnerable segment
Micro and small enterprises may be particularly vulnerable to the economic effects of El Niño because they often operate with limited cash reserves, a small number of suppliers, concentrated customer bases, limited insurance coverage and a high dependence on daily cash flow. Even a short-term disruption to supplies, transportation, electricity, customer demand or working capital can therefore have a disproportionate impact on their operations and profitability. Small businesses should consequently place greater emphasis on cash-flow forecasting, supplier diversification, emergency liquidity, appropriate insurance and prudent inventory management. A 13-week rolling cash-flow forecast can be particularly valuable, especially for businesses operating with tight working-capital cycles, as it enables business owners to identify potential cash shortages early and take corrective action. Ultimately, climate resilience should become an integral part of SME management and financial planning, rather than being viewed solely as a responsibility of the Government.
Impact on trade and importers
El Niño-related disruptions in major agricultural and commodity-producing economies can influence global commodity prices, freight rates and supply-chain conditions. Sri Lankan importers should therefore closely monitor international prices, freight and insurance costs, exchange-rate movements and delivery schedules, as these factors can directly affect their landed costs and working-capital requirements. Importers may face higher purchase prices, increased freight and insurance costs, longer delivery periods and greater financing requirements as they seek to maintain adequate inventory levels. However, businesses should avoid unnecessary or speculative stockpiling, which can itself create cash-flow and inventory risks. Instead, the emphasis should be on strategic inventory management, supplier diversification and appropriate contingency planning. Exporters should similarly assess the availability and cost of raw materials, the potential for production and logistics disruptions, changes in international commodity prices and possible shifts in overseas demand. In an increasingly interconnected global economy, El Niño-related supply disruptions in one region can ultimately affect the competitiveness, pricing and profitability of Sri Lankan businesses engaged in international trade.
El Niño and taxpayers
El Niño-related events also have direct implications for business taxpayers. A business affected by flooding, drought, supply-chain disruption or other climate-related events may experience damaged or destroyed inventory and assets, increased repair and replacement costs, business interruption, reduced turnover and higher operating expenses. In such circumstances, proper accounting records and supporting documentation become particularly important. Businesses should maintain clear records relating to damaged or destroyed inventory, asset damage, insurance claims and recoveries, repair and replacement costs, extraordinary expenditure and losses arising from business interruption. These records can support the preparation of accurate financial statements and tax computations and help substantiate relevant claims or adjustments where permitted under the applicable tax laws. Since the tax treatment of such losses, expenses, asset disposals, insurance recoveries and other transactions will depend on the specific circumstances and prevailing tax legislation, taxpayers should obtain appropriate professional tax and accounting advice before making significant accounting or tax adjustments.
VAT, SSCL and cash flow
For many businesses, the immediate challenge arising from climate-related disruption may be liquidity rather than profitability. A business may remain profitable in its financial statements while simultaneously experiencing significant cash-flow pressure due to higher inventory costs, delayed customer collections, increased transportation and electricity expenses, and additional financing requirements. At the same time, statutory obligations such as VAT, SSCL, APIT (PAYE) and other applicable taxes continue to require timely attention. Businesses should therefore incorporate their tax and other statutory payments into rolling cash-flow forecasts and actively manage working capital during periods of uncertainty. Where climate-related disruptions affect operations, taxpayers should also maintain proper records and seek professional advice where appropriate, rather than allowing temporary cash-flow difficulties to develop into avoidable tax arrears, penalties or compliance issues. Sound tax planning and disciplined cash-flow management are therefore essential components of business resilience.
Impact on Government revenue
The potential impact of El Niño on Government revenue and fiscal management is an important macroeconomic consideration. If climate-related disruptions weaken overall economic activity, corporate profitability and taxable income may come under pressure, while VAT and SSCL collections could also be affected by changes in business turnover and consumer spending. Similarly, changes in import volumes and international commodity prices could influence Customs and other import-related revenue. At the same time, the Government may face additional expenditure on disaster relief, infrastructure rehabilitation, agricultural support, food-security measures, water management and other climate-related interventions. This could create a challenging fiscal situation in which revenue growth slows while public expenditure increases. Accordingly, potential El Niño-related economic disruptions should be incorporated into Sri Lanka’s fiscal-risk assessment, revenue forecasting and broader economic stress-testing framework, enabling policymakers to anticipate pressures rather than respond only after they materialise.
What should policymakers do?
Sri Lanka should adopt a coordinated and forward-looking approach to manage the potential economic consequences of El Niño, with particular emphasis on food security, water, energy, early warning systems and fiscal preparedness. Food security measures should include close monitoring of rice, wheat, maize, pulses, vegetable oils, fertiliser and other essential commodities, together with appropriate contingency arrangements where necessary. In water management, seasonal climate forecasts should be integrated into reservoir operations, irrigation planning and water allocation decisions. Energy security should be strengthened through greater investment in renewable energy, energy storage, efficiency and demand-side management, thereby reducing excessive dependence on weather-sensitive generation. At the same time, early-warning systems should be strengthened so that timely and reliable information reaches the public, farmers and businesses through SMS, television, radio, social media and local authorities in Sinhala, Tamil and English. From a fiscal perspective, the Government should assess the potential effects of climate-related shocks on tax revenue, imports, subsidies, disaster-related expenditure, agricultural support and infrastructure rehabilitation and incorporate these risks into fiscal planning.
Importantly, the Government has already established a Special Cabinet Sub-Committee and an Officials’ Committee to address the potential impact of El Niño. This is a positive and timely step. However, the next stage should be to extend preparedness beyond Government institutions and establish stronger coordination with business organisations, trade associations, farmers, financial institutions, professional bodies, taxpayers and the general public. Climate resilience must become a shared national economic responsibility rather than solely a Government responsibility.
Every business should consider conducting a Climate Risk Review as part of its broader risk-management and business-continuity process. This should include reviewing the supply chain to identify critical suppliers and suitable alternatives; preparing rolling 13-week cash-flow forecasts to identify potential liquidity pressures at an early stage; reviewing insurance coverage for flood, storm, property damage, inventory losses and business interruption; assessing inventory requirements and maintaining reasonable contingency stocks where commercially justified; reviewing energy efficiency and alternative energy sources; and ensuring tax and regulatory compliance through proper records and timely payment of VAT, SSCL, APIT (PAYE) and other applicable statutory obligations, even during periods of operational disruption. Businesses should also have a clear Business Continuity Plan covering how essential operations would be maintained if production, supplies, transport, electricity or other critical activities were disrupted for one or two weeks. This is where the role of the Chartered Accountant becomes increasingly valuable. The modern CA should not merely report what happened in the previous financial year, but also help management assess what may happen next. The key questions should be: What could happen? What would be the financial impact? Can the business finance the additional cost? What risks can be transferred through insurance or other arrangements? And what decisions should management take now? In this way, the Chartered Accountant can contribute not only to compliance and financial reporting, but also to forward-looking risk management, financial resilience and informed business decision-making.
Households should remain informed without becoming alarmed. They should follow official weather and disaster-management information, conserve water, maintain reasonable emergency supplies, protect important documents and prepare for temporary electricity or transport disruptions. Unnecessary borrowing and excessive food hoarding should be avoided. Most importantly, households should rely on verified official information rather than social-media rumours. The objective is simple: preparedness, not panic.
A business opportunity in climate risk
El Niño should not be viewed only as a source of risk; it can also create new business and investment opportunities as businesses, Government and households seek greater resilience to climate-related disruptions. Growing demand for renewable energy, battery storage, water-saving technologies, efficient irrigation, climate-smart agriculture, food storage and cold-chain logistics can create opportunities for entrepreneurs and investors. There may also be increasing demand for insurance and risk-management solutions, disaster-resilient construction, weather-information and early-warning technologies, and more resilient supply-chain systems. For Sri Lankan businesses, this emerging demand represents an opportunity to develop products and services that help customers reduce their exposure to climate-related risks. Entrepreneurs should therefore ask a forward-looking question: ‘What products and services will businesses, Government and households need as climate volatility increases?’ In this sense, climate risk can create new markets, new investments and new avenues for innovation and economic growth.
Conclusion: El Niño is a climate warning – but also an economic warning
The 2026 El Niño should not be viewed simply as a weather event occurring thousands of kilometres away in the Pacific. Its consequences can extend into Sri Lanka’s production, food and commodity prices, trade, business costs, taxation, Government revenue, public expenditure and household purchasing power. With international forecasts indicating a very high probability of a very strong El Niño during late 2026 and early 2027, and Sri Lanka’s Department of Meteorology issuing a similarly serious warning, the country should treat the situation as an emerging economic and business-risk issue.
The appropriate response is neither panic nor complacency, but preparedness and risk management. For the Government, this means strengthening fiscal resilience, food security, energy security and water management. Businesses should focus on cash-flow resilience, supply-chain diversification, appropriate insurance and business continuity. Traders should strengthen inventory management, supplier diversification and monitoring of commodity prices and foreign-exchange risks. Taxpayers should maintain proper accounting records, prudent cash-flow planning, timely statutory compliance and appropriate professional advice. Households should practise financial prudence, sensible preparedness and reliance on reliable information. For Chartered Accountants and other professional advisers, the changing environment provides an opportunity to move beyond traditional compliance and financial reporting towards forward-looking business resilience, risk assessment and strategic decision-making.
Sri Lanka cannot control El Niño, the temperature of the Pacific Ocean or global commodity markets. What Sri Lanka can control is how well it prepares and responds. El Niño may begin in the Pacific, but its economic consequences can ultimately appear in business costs, tax payments, trade flows, Government budgets and household expenditure. The real challenge is therefore not simply to predict the weather, but to strengthen the resilience of the economy before the impact materialises.