By: Staff Writer
July 28, Colombo (LNW): Sri Lanka’s inflation management policy is under renewed public discussion following Deputy Economic Development Minister Anil Jayantha Fernando’s recent comments in Parliament. Minister Fernando explained that the 5% inflation target currently adopted by the Central Bank is based on past inflation trends and may be revised in the future if deemed unsuitable.
Responding to a query from opposition MP Ravi Karunanayake, the Minister clarified that the Central Bank had set the inflation target based on its historical performance. “If it is not appropriate in the future, we can change it accordingly,” he said, noting that the current inflation framework agreed with the government is in effect until 2026.
While the Minister’s remarks aimed to present the target as flexible, economists and analysts have noted that using historical inflation data as a benchmark without strong forward-looking anchors could raise questions about long-term monetary credibility.
Critics of the inflation targeting framework argue that since the end of Sri Lanka’s civil war, several currency crises occurred — notably in 2012, 2015/16, 2018, and 2020/21 — resulting in the rupee depreciating from Rs. 113 to as much as Rs. 360 per US dollar. These sharp declines contributed to rising food and commodity prices and significantly reduced real wages, impacting household finances and triggering social unrest.
In Parliament earlier this year, Minister Fernando, highlighted that it was funded entirely through real borrowings, both domestic and foreign, without resorting to inflationary financing. “We have not moved to fill this gap with inflationary ways or money printing,” he stated, adding that Rs. 2,125 billion would be raised locally and $75 million from foreign sources.
Economists note that while Sri Lanka’s monetary policy took a more disciplined turn from late 2022 to 2024 — allowing the rupee to stabilize around Rs. 300 per dollar — the long-term effectiveness of the 5% inflation target remains debated.
Concerns have been raised over the absence of strong tools like quantitative policy tightening (QPC) under the current IMF-supported programme, which could increase the risk of renewed currency pressure if reserve accumulation efforts are not backed by appropriate policy measures.
Historical context adds to the caution. During the 1950s, soon after the establishment of the Central Bank, efforts to sterilize capital flows and support government borrowing contributed to Sri Lanka’s first major currency crisis in 1953.
More recently, global experiences during the 1970s and early 1980s — including the collapse of the Bretton Woods system and resulting inflation — illustrate the importance of credible monetary anchors.
Countries like New Zealand, which adopted a 0–2% inflation target in the 1990s, used such anchors to stabilize their economies successfully. In contrast, some analysts say Sri Lanka’s 5% target — though defensible based on past trends — needs stronger justification grounded in economic fundamentals.
As Sri Lanka works to maintain stability while managing debt and promoting growth, the inflation target and broader monetary strategy are likely to remain central themes in shaping investor confidence and long-term economic resilience.
