Government under Pressure to Reform Central Bank Mandate as Inflation Fuels Public Hardship
By: Staff Writer
August 06, Colombo (LNW): Mounting inflation and weakening consumer purchasing power are intensifying pressure on the Government to overhaul Sri Lanka’s monetary policy, with former Finance Minister Ravi Karunanayake calling for sweeping structural reforms ahead of the October 2026 review of the Monetary Policy Framework Agreement.
The intervention comes as households continue to grapple with rising food prices, soaring rents and escalating transport costs, despite repeated assurances that inflationary pressures are temporary.
Karunanayake argues that the current IMF-supported monetary framework has become too narrowly focused on controlling inflation while neglecting economic growth, employment and productive investment.
He believes this imbalance is prolonging economic pain rather than accelerating recovery.
Central to his criticism is the claim that Sri Lanka’s inflation is largely supply-driven rather than demand-driven.
The recent 47 percent fuel price increase, triggered by geopolitical tensions in the Middle East, has pushed up production costs across virtually every sector.
Combined with rising food prices and housing costs, inflation has become embedded in essential household expenditure, leaving consumers with fewer options to reduce spending.
Although the Central Bank raised the Overnight Policy Rate to 8.75 percent in May and maintained that position in July, Karunanayake questions whether higher borrowing costs can effectively address supply-side inflation.
He argues that expensive credit risks slowing investment and economic expansion while doing little to reduce externally driven price increases.
The former Finance Minister is proposing a fundamental shift in the Central Bank’s legal mandate.
Rather than focusing almost exclusively on inflation, he wants the October statutory review to introduce dual objectives that require the Central Bank to simultaneously safeguard price stability while supporting economic growth and employment.
His proposals also call for greater parliamentary oversight through mandatory quarterly accountability reports by the Central Bank Governor whenever inflation deviates from revised targets.
In addition, he recommends legally linking monetary policy to stronger accumulation of foreign exchange reserves to better protect Sri Lanka from future balance-of-payments crises.
Export competitiveness is another key pillar of his recommendations.
Karunanayake argues that exchange-rate management should encourage domestic production and exports instead of reinforcing the country’s dependence on imports.
Such reforms, he says, would stimulate investment, strengthen industrial capacity and create more sustainable long-term growth.
The IMF continues to maintain that inflation is likely to peak before easing over the next two years.
However, critics argue that relying solely on that forecast risks extending financial hardship for millions already struggling with declining real incomes.
As October’s legally mandated review approaches, economists, businesses and consumers alike will be watching closely to see whether the Government is prepared to reconsider its monetary strategy or continue defending the existing framework.
The outcome could determine whether Sri Lanka merely stabilizes after its debt crisis—or succeeds in achieving a durable and inclusive economic recovery that restores public confidence while protecting living standards.
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