Sri Lanka’s inflation will remain firm at single digit levels and has very little chance to rebound to the double-digit levels seen during the time of war, Sri Lanka’s Central Bank Governor Arjuna Mahendran said. He recognized the supply side improvements that took place with the end of war as one of the key reasons backing the benign inflation forecast. Mahendran during a presentation at a recently concluded investor forum in Singapore showed that contribution of the Western Province to the country’s overall growth had increased from 14 percent to 51 percent between 1996 and 2005. “That was a symptom of the weakness of the supply side of the economy as a consequence of the civil war,
which reined during those years,” Mahendran said. However, he pointed out that five years after the war, in 2014, a reversal of this scenario took place as the supply from the outlier provinces of the economy was seen improving. “So I think in general we can safely say that there has been an improvement in the supply side and therefore inflation has behaved very well.” M a h e n d r a n a l s o acknowledged the present global deflationary trends helping the country to keep the inflation under control. “We don’t see inflation posing much of a threat. From a medium term perspective the Central Bank is targeting an inflation of 3 to 4 percent,” he said. Sri Lanka’s consumer prices in February rose 2.7 percent from a year earlier, accelerating from the previous month’s 0.9 percent. The annual core inflation hit a 33-month high of 5.7 percent year-on-year
Analysts say that rising cost of funds and input costs will push consumer prices higher in the coming months. The recent upward tax revisions brought in by the government—especially the 2.5 percent VAT increase—will result in higher consumer prices, they opine. Sri Lanka’s domestic bank credit growth in 2015 was three times that of 2014—a result of the relaxed monetary policy by the Central Bank and the government to spur growth.
This however exerted tremendous pressure on the country’s balance of payments position—as noninvestment imports such as personal vehicles rose and the rupee currency. The devaluation of the Chinese currency and outflow of funds from frontier markets also took a toll on the island nation’s economy. To arrest the situation, the government in its latest monetary policy review, hiked policy rates by 50 basis points. And also Sri Lanka is currently in discussion with the International Monetary Fund for BoP support. The prevailing lower international oil prices could be seen as the only solace for the country. However, the continuation of lower oil prices will depend on the result of the ongoing discussions among oil exporting countries to cut supply to prop up global oil prices. An upward revision in oil prices could dash the Central Bank’s hopes for lower inflation in going forward, analysts opine