Sri Lanka’s inflation expected to hit 5% in medium term, report says

Sri Lanka’s spike in inflation is expected to be short-lived and will return to the targeted 5% in the medium term, a monetary policy report released by the central bank said on Thursday as the island nation’s economy stabilises from a crippling financial crisis.

Sri Lanka’s economy is seeing glimmers of recovery, helped by a $2.9 billion International Monetary Fund (IMF) programme, after it went into freefall in 2022 due to a severe foreign exchange shortage.

At the start of 2024, Sri Lanka raised its value added tax (VAT) to 18% from 15% to meet revenue targets under the IMF programme, sparking a renewed rise in its key inflation rate, which rose to 6.4% at the end of last month from 4% in December.

The Central Bank of Sri Lanka (CBSL), which committed to maintaining inflation at 5% under a new law introduced last year, said price increases from the tax hike in January were unlikely to persist due to subdued demand and the economy operating below its full capacity.

The central bank slashed interest rates by 650 basis points last year to help Sri Lanka’s economy recover from soaring inflation, currency depreciation, and low reserves.

The World Bank expects Sri Lanka’s economy to grow by 1.7% this year after contracting 3.8% in 2023.

However, reforms mandated under the IMF programme would need to be speeded up to keep the recovery on track, the report said.

Source: Reuters

--Agencies