Sri Lanka Records Deflation amid Central Bank’s Currency Stability Measures

By: Staff Writer

October 01, Colombo (LNW): Sri Lanka’s central bank has reported a 0.1% deflation in the past 12 months, largely attributed to its deflationary monetary policies and a focus on currency stability.

The Colombo Consumer Price Index (CCPI), a key indicator of inflation, has been in decline since March 2024, except for a brief rise in June due to excess liquidity from dollar purchases.

This deflation marks a significant shift from the high inflation rates that had plagued the country in recent years.

The central bank’s efforts to stabilize the currency began in March 2023, when it lifted a surrender rule that had contributed to a currency collapse during a failed float in 2022.

This move allowed the Sri Lankan rupee to appreciate, driving down prices of traded goods and food, even as service costs increased to compensate for the earlier currency depreciation.

 Since then, inflation has remained low, with almost no inflation recorded for the 24 months leading up to September 2024.

Sri Lanka’s inflation challenges are often attributed to the central bank’s lack of a credible anchor, compounded by International Monetary Fund (IMF) advice that critics argue is based on faulty economic doctrines.

Despite these critiques, former State Finance Minister Shehan Semasinghe defended the previous government’s economic reforms, highlighting the significant progress in stabilizing the economy. He noted that when the government took office in 2022, inflation was as high as 70%, with food inflation peaking at 95%.

As of September 2024, Sri Lanka had achieved 0.5% deflation, a dramatic improvement from previous inflation rates. Food inflation also declined, turning to -0.3%, while non-food inflation dropped to -0.5%.

These figures, according to Semasinghe, demonstrate the effectiveness of the government’s policies in controlling inflation and stabilizing the economy.

However, despite these improvements, the foremer President Ranil Wickremesinghe administration lost power after the recent presidential election.

Marxist leader Anura Kumara Dissanayake won the presidency after campaigning against economic reforms implemented by the previous government, including high taxes and the restructuring of state-owned enterprises.

Wickremesinghe’s policies, heavily influenced by the IMF, were seen as unpopular among voters, leading to his defeat in the election. Despite this setback, Wickremesinghe’s coalition, including Semasinghe, is looking to make a comeback in the upcoming November general elections.

Sri Lanka’s economy had been in turmoil since its default in 2022, a result of years of flawed monetary policies aimed at output targeting and flexible inflation targeting without a clean float.

Despite the central bank’s efforts, analysts warn that the current IMF-supported framework could be problematic if inflationary policies resume when private credit recovers. Critics also point to the central bank’s plan to operate a single policy rate, which they believe could harm the poor and lead to further currency crises. In the 24 months leading to September 2024, the central bank has managed to keep inflation at just 0.84%, according to the CCPI. However, analysts remain cautious, warning that the economy could collapse if inflationary policies return.