Sri Lanka’s May consumer prices jump after tax hike

REUTERS: Sri Lanka’s May consumer prices and core annual inflation rose to multi-month highs, data from the state-run Census and Statistics Department showed on Tuesday after the government increased value-added tax (VAT) to crimp a soaring deficit. Sri Lanka’s consumer prices rose to a 25-month high of 4.8 percent in May from a year earlier, accelerating from the previous month’s 3.1 percent year-on-year rise.

The core annual inflation, which excludes fresh food, energy, transport, rice and coconuts, rose to a 38-month high of 6.6 percent, from the previous month’s 4.5 percent. The government, facing a revenue shortfall and ballooning budget deficit, raised VAT to 15 percent from 11 percent with effect from May 2.

However, the Central Bank said in its monetary policy announcement the increase in the VAT rate and the removal of certain exemptions from VAT and the Nation Building Tax were only expected to have a one-off impact on inflation.

It also said the supply side disruptions due to adverse weather conditions could exert some upward pressure on inflation in the immediate future. “The rise in both headline and core inflation was expected in May, given the upward tax revisions and impact particularly on non-food items,” said Shiran Fernando, an analyst at Colombobased Frontier Research.Sri Lanka’s May... “Pressure will be there. If the inflation goes beyond the Central Bank’s expected level, it will be a concern.” The Central Bank nonetheless expects the inflation to remain in mid single digit levels supported by appropriate demand management policies.

The Central Bank has kept the key policy rates steady - with standing deposit facility (SDF) rate and the standing lending facility rate (SLFR) at 6.50 percent and 8.00 percent, respectively - for three straight months amid private sector credit growth that has been rising despite previous tightening measures. Higher private sector credit growth, which expanded at a near four-year high of 27.7 percent in March year-on-year, has raised concerns over demand-driven inflationary pressure.