ECONOMYNEXT – Sri Lanka’s central bank has produced 0.1 percent deflation over the past 12-months based on the widely watched Colombo Consumer Price Index, running broadly deflationary policy with currency stability, official data show.
The Colombo Consumer Price Index fell almost continuously from March 2024, except June when the currency also came under pressure from excess liquidity from dollar purchases.
Sri Lanka’s central bank has produced almost no inflation for 24 months since September 2024, when its deflationary policy began to show up in the balance of payments.
In March 2023, the central bank lifted a surrender rule, that had led to a collapse of the currency during a failed float in 2022, and allowed the exchange rate to appreciate from 360 to around 300 sharply bringing down traded goods and food prices, even as services went up to make up for the currency collapse.
Sri Lanka has high inflation usually due to lack of a credible anchor for the central bank compounded International Monetary Fund technical advice based on spurious monetary doctrines involving anchor conflicts, critic say.
Sri Lanka went into default 2022 after several years of by mis-using the money monopoly for potential output targeting (so-called macro-economic policy) in a flexible inflation targeting environment (inflation targeting without a clean float).
However the deadly 5 percent inflation target has been missed in recent months amid currency appreciation.
Amid stable or gently falling prices economic growth has taken off.
In the 24 months to September 2024 the central bank has produced only 0.84 percent inflation according to CCPI price gauge.
Food prices have fallen 5.5 percent in the same period, despite an increase in Value Added Tax.
Meanwhile global prices have also come down due to US Fed tightening.
Inflation is always and everywhere a monetary phenomenon.
Analysts who predicted the external meltdown however have warned the central bank’s IMF supported operating framework is fundamentally flawed (it has in the past cut rates with inflationary open market operations claiming inflation was low) and the country can collapse when private credit recovers and inflationary policy resumes.
In another deadly twist it is also planning to operate a single policy rate, depriving the protection to the poor from a policy corridor, despite triggering serial currency crises and a sovereign default without a war by targeting call money rate obsessively.
The central bank has denied monetary stability to the country for almost 74 years making the island which was said to have the best indicators outside of Japan when it got independence with a currency board, to a sovereign default in 2024. (Colombo/Aug30/2024)