Sri Lanka Sees Inflation Plunge to Single Digits as Economy Rebounds from Crisis
Sri Lanka experiences a significant decrease in its inflation rate, reaching single-digit levels for the first time in two years. The drop in inflation is attributed to various factors and comes at a crucial time for the cash-strapped nation. Efforts by the government, along with the IMF bailout, are expected to help stabilize and revive the economy.
In a much-needed relief for the cash-strapped nation, Sri Lanka has witnessed a significant drop in its inflation rate. According to the Colombo Consumer Price Index (CCPI) data, the inflation rate has reached single-digit levels, with July reporting a rate of 6.3 percent, down from 12 percent in June.
This marks the first time in two years that Sri Lanka has recorded single-digit inflation. The decline in inflation can be attributed to various factors, including the decrease in the cost of food commodities. Over the past 12 months, food prices have fallen by 1.4 percent, according to the index.
The sharp reduction in headline inflation can also be attributed to the high statistical base effect from the previous year and the deceleration in non-food inflation. In July, food inflation dropped to -1.4 percent from 4.1 percent in June, while non-food inflation decreased to 10.5 percent from 16.2 percent in June.
This significant drop in inflation comes at a crucial time for Sri Lanka, which has been grappling with its worst economic crisis since independence in 1948. The country faced a shortage of foreign exchange reserves and loss of access to international capital markets, resulting in its first-ever sovereign default in April 2022.
The economy was further impacted by unchecked external borrowings, increased budget deficit due to tax cuts, restrictions on importing chemical fertilizer, and the sudden floatation of the Sri Lankan rupee. Additionally, the COVID-19 pandemic severely affected the country's tourism sector, adding to its economic woes.
To address these challenges, Sri Lanka secured a bailout package of USD 2.9 billion from the International Monetary Fund (IMF) in March this year. The country has been working on relaxing import restrictions and taking measures to end power shortages, which have contributed to the improvement in the economic situation.
Governor of the Central Bank, Nandalal Weerasinghe, had previously stated that the country aims to achieve single-digit inflation by the third quarter of this year. The current drop in inflation is a positive development for Sri Lanka as it strives to stabilize its economy and recover from its financial crisis. The government's efforts, combined with the IMF bailout and other measures, are expected to further contribute to the country's economic recovery.
