Sri Lanka’s headline inflation hit a multi-year high of 7.3 percent in March, accelerating from 6.8 percent in February mainly due to the base effects through the recent drought and the demand push factors.
The core inflation also rose to 7.3 percent on a Year-on-Year basis, from 7.1 percent a month ago. Further the moving average inflation reached 5.0 percent in March, accelerating from 4.6 percent in February.
March’s inflation measured by the Colombo Consumer Price Index (CCPI) is the highest since May 2013 when the economy was recovering from a balance of payment crisis faced in 2012.
But the context was different then as the inflation was easing from a peak of 9.8 percent it reached in January 2013 while the economy was stabilizing after the stand-by arrangement with the International Monetary Fund (IMF).
But in the current context, prices have been heading north since November 2016 even after the economy was bailed out again by the IMF in June 2016.
Sri Lanka’s Central Bank raised its key policy rates by another 25 basis points— its second time in eight months—as a proactive measure to keep rising prices under check.
The rupee has been weakening and the gross official reserves have fallen to US $ 5.1 billion from US $ 6.0 billion in late January 2017.
According to the data released by the Department of Census and Statistics last Friday, the food prices overall demonstrated a decline from February as the prices of rice declined after the government started selling imported rice at controlled prices.
However the coconut prices reached further highs in March as reflected by the price index for the month. A price of a nut was Rs.80 last week—a level never seen in a country known for growing coconut.
Non-food prices changed little with overall impact having a positive effect on the index for March.
It is expected that pressure on prices would prevail even during this month, as April is a month of festivities for the Lankans celebrating Sinhala and Tamil New Year.
This could be further exacerbated by the weakening rupee against the dollar in the coming weeks as the imports bypass exports in Sri Lanka.
The persistent drought condition in main cultivating regions, stubbornly high bank credit, excessively high government borrowings, non-realization of expected dollar inflows and continued sell-offs of foreign holdings in government securities could plunge the country into another BoP crisis sooner than later.
Therefore the government is hurrying the sale of the Hambantota Port to the Chinese in return of a billion dollars which would be received in three tranches.
A bill to that effect would be presented to Parliament in two weeks, Malik Samarawickarama, Development Strategies and International Trade Minister said during the weekend.
In addition, the Central Bank is banking on another fresh borrowing of at least US $ 2.6 billion via a US $ 1.5 billion sovereign bond sale, a US $ 450 million syndicated loan and another US $ 200 million loan from the China Development Bank.