Central Bank Official Forecasts Sri Lanka Inflation to Hit 5% in Q3-Q4

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According to a Central Bank of Sri Lanka (CBSL) official, Sri Lanka’s inflation is anticipated to return to the government’s target of 5% starting from the last two quarters of the year. This projection comes as the country’s economy stabilizes following a severe financial crisis.

The recent signs of recovery in the economy have been supported by a $2.9 billion International Monetary Fund (IMF) program, which was initiated after Sri Lanka experienced a significant foreign exchange shortage in 2022, leading to a financial crisis.

S. Jegajeevan, the director of CBSL’s economic research department, stated that inflation is expected to gradually reach 5% in the medium term, specifically from the third quarter to the end of the year. He also mentioned that the high base effect from tax increases could contribute to lower inflation rates in early 2025.

Sri Lanka defaulted on its overseas debt in May 2022 due to depleted foreign exchange reserves, triggering one of the country’s worst financial crises since gaining independence from Britain in 1948.

At the beginning of 2024, Sri Lanka increased its value-added tax (VAT) from 15% to 18% to meet revenue targets outlined in the IMF program. This adjustment led to a rise in the country’s key inflation rate, which reached 6.4% by the end of January, up from 4% the previous month.

The CBSL remains committed to maintaining inflation at 5%, as mandated by a new act introduced last year. Despite the temporary impact of the tax hike on inflation, subdued demand and the economy operating below its full capacity are expected to mitigate sustained price increases.