Sri Lanka Targets 5% Inflation in Economic Revival Bid Amid Crisis

As Sri Lanka gropes to cope with the devastating financial crisis, the CBSL has formulated a strategic goal of stabilizing inflation at 5% in the latter half of the year. This move coincides with other steps taken by the government to return the economy to stability after years of turmoil when the nation declared bankruptcy overseas and joined an IMF-supported recovery program.

Economic Recovery Approaches

The island country that saw an unparalleled economic challenge in 2022, including a significant foreign exchange shortage, is now showing signs of recovery. This positive outlook is supported by a $2.9 billion IMF financial assistance program aimed at sustaining the economy. 

As per S. Jegajeevan, director of CBSL's economic research department, it is anticipated that inflation rates will start dropping during the third quarter and continue until the end of the year. This is supported by the strong base effect of recent tax hikes, which will continue to help inflation dynamics through early 2025, possibly taking the rate below the five percent threshold.

Sri Lanka's Tax Adjustments

At the start of 2024, according to the IMF program, Sri Lanka raised the VAT rate to 18% from the earlier 15% as a mechanism of achieving the revenue targets. This change was manifested by the temporary rise in the headline inflation rate to 6.4% at the end of January, compared with 4% in the previous month.

Nevertheless, the CBSL remains committed to this target, backed up by an act that was introduced last year. The bank expects that the price hikes due to the increase in VAT will not persist, given adverse demand and the economy's operation well below potential.

Fostering International Relations and Economic Development

Alongside these economic stabilization initiatives, Sri Lanka is working on developing its international ties and attracting foreign investments. A striking step in this regard is the offer made to the Iranian contractors and industrial firms to participate in projects in the country, emphasizing the excellent relationship between Sri Lanka and Iran. 

The other pertains to the recent introduction of India's Unified Payment Interface (UPI) services in Sri Lanka, which is said to play an integral part in increasing tourism earnings and contributing to Sri Lanka's economic recovery and development. 

Trade Deals and Regional Collaboration

In addition to measures aimed at immediate economic recovery, Sri Lanka's strategic emphasis involves the conclusion of trade treaties and the promotion of regional unity. The negotiations on the Economic and Trade Cooperation Agreement (ETCA) with India, in particular, are a milestone to be realized as they tend to increase bilateral trade and investment. 

Furthermore, signing a Free Trade Agreement (FTA) with Thailand is a clear sign of Sri Lanka's determination to widen its economic sphere and take advantage of the international partnerships available for the recovery of the economy.