Sri Lanka Inflation to Plummet From 70% to 4% or 5% by End of 2023, Central Bank Forecasts

The headline inflation in the country dropped to 70.6 percent last month from 73.6 percent registered in September. This is the highest inflation rate across Asia.

Sri Lanka's Central Bank Governor Nandalal Weerasinghe said on Monday that the headline inflation in the battered economy would plunge significantly to 4 or 5 percent by the end of 2023.

Addressing an investors’ forum in Colombo, the lead federal banker said that easing inflation in the cash-starved economy would allow the central bank to ease a key currency band as the government needs a “flexible exchange rate”.

A press statement by the central bank explained that a “tight monetary policy stance” is needed to contain demand-driven inflationary pressure and strengthen disinflation expectations.

Headline inflation, as measured by the year-on-year change in the National Consumer Price Index (NCPI), reduced marginally in October, the first time it dropped in more than a year. Despite this, Sri Lanka’s overall inflation level remains at a record high.

Weerasinghe expressed confidence that consumer prices will continue to be on a “disinflation path” for the coming months and appealed to creditors to help bring down market rates by infusing liquidity in the markets as the inflation levels improve.

He further remarked that the debt-restructuring process was another important step in aiding the economic recovery of the country, and the government is holding negotiations with the country’s creditors, which include the Paris Club nations as well as non-Paris Club countries, such as India and China.

In September, the International Monetary Fund (IMF) announced an interim bail-out agreement with Colombo valued at $2.9Bln to infuse liquidity into the markets. However, the disbursement of funds under the IMF package is dependent on approval from the Washington-based lender’s Executive Board, which would only happen once Colombo’s creditors private and government creditors agree to restructure their debt.

Weerasinghe expressed optimism that the IMF funds would be disbursed in January next year.

Colombo believes that the disbursement of IMF funds would lead to more cash inflows from other multilateral institutions such as the Asian Development Bank (ADB) and the World Bank.

The country is in the middle of navigating its way out of its worst economic crisis in more than seven decades because of a crippling shortage of foreign currency reserves which left the import-reliant economy unable to pay for food, fuel and other essentials.

In April, Sri Lanka announced a default on its foreign debt repayments.