Sri Lanka Inflation To Reach 5% Target During Q3-Q4: Central Bank Official

Colombo [Sri Lanka] : Inflation in Sri Lanka is expected to return to the government's 5 per cent target starting from the last two quarters of the current year, Reuters reported, citing a Central Bank of Sri Lanka (CBSL) official said.

The island nation's economy is stabilising from a crippling financial crisis of 2022, which was triggered by depleting foreign exchange reserves. Sri Lanka faced a severe economic crisis as a result of past policy missteps.

Its economy has shown signs of recovery in recent months, aided by a USD 2.9 billion International Monetary Fund (IMF) programme.

"Inflation is projected to reach 5 per cent in the medium term, which is from about the third quarter to the end of the year," S. Jegajeevan, the director of CBSL's economic research department, told reporters, as per Reuters.

It is possible that the inflation print may even come lower than 5 per cent, the central bank official said. 
The island nation defaulted on its overseas debt in May 2022 after depleted foreign exchange reserves triggered the worst financial crisis since its Independence.

Earlier this earlier, Sri Lanka raised its value-added tax (VAT) to 18 per cent from 15 per cent to meet revenue targets under the IMF programme. It sparked an uptick in its key inflation rate, which rose to 6.4 per cent at the end of January from 4 per cent the month before.

The Sri Lanka central bank, which committed to maintaining inflation at 5 per cent under a new Act introduced last year, said price increases from the tax hike were unlikely to persist due to subdued demand and the economy operating below its full capacity.

Last year, Krishna Srinivasan, Director of Asia and Pacific Department, IMF, said the country's economic prospects hinged quite critically on the implementation of the economic reform program it had agreed in particular for five key areas.

The five key areas were an ambitious revenue-based fiscal consolidation, restoration of public debt sustainability, a multi-pronged strategy to restore price stability and rebuild reserves, policies to safeguard financial sector stability, and structural reforms to address corruption vulnerabilities and enhance growth.