By: Staff Writer
June 21, Colombo (LNW): Opposition MP Ravi Karunanayake has launched a fresh debate on Sri Lanka’s economic direction, arguing that the country’s recurring financial crises stem less from inflation and more from chronic balance-of-payments weaknesses that continue to expose the economy to instability.
In a detailed appeal to President Anura Kumara Dissanayake ahead of the scheduled 2026 review of the Monetary Policy Framework Agreement, Karunanayake called for a major shift in the way policymaker’s measure and pursue economic stability.
The former Finance Minister argues that Sri Lanka’s history tells a clear story: repeated economic collapses have been triggered by shortages of foreign exchange, reserve depletion, and excessive dependence on external financing rather than by conventional inflationary pressures alone.
According to Karunanayake, decades of currency depreciation, weak domestic savings, inadequate capital formation, and recurring balance-of-payments pressures have left the country vulnerable to shocks. He believes future monetary policy must therefore move beyond a narrow focus on consumer prices and incorporate broader indicators of economic health.
Among the changes proposed are stronger emphasis on foreign reserve accumulation, increased domestic savings, productive investment, export competitiveness, and capital formation. He also called for enhanced Central Bank accountability through regular reporting to Parliament on inflation trends, exchange-rate stability, reserve growth, and broader economic outcomes.
Karunanayake supported his argument by comparing Sri Lanka’s inflation target with those maintained by several regional and advanced economies. He noted that many countries operate with lower inflation objectives, generally ranging between 2% and 4%, while major central banks in Europe, North America, and other developed economies seek to maintain inflation close to 2%.
The common thread, he argued, is that successful economies prioritize predictable and stable inflation while maintaining confidence in their currencies. Such credibility encourages savings, attracts investment, and supports sustainable economic growth.
A key concern highlighted in the letter is the risk of policymakers tolerating relatively high inflation while economic activity remains subdued. Karunanayake warned that such an approach could create a damaging scenario where growth stagnates but living costs continue to rise, leaving households under increasing financial pressure.
He argued that Sri Lanka’s inflation is often driven by factors beyond domestic demand, including imported fuel prices, supply-chain disruptions, tax changes, utility tariff adjustments, and movements in global commodity markets. These influences, he suggested, require a more comprehensive policy response than interest-rate adjustments alone.
As the October 2026 review approaches, Karunanayake is urging authorities to seize what he describes as a strategic opportunity to redesign the country’s monetary architecture. His recommendations include lowering the inflation target to between 2% and 3%, narrowing the tolerance band around that target, and formally recognizing Sri Lanka’s historic exposure to balance-of-payments crises.
The debate now centers on whether policymakers will embrace a broader framework that prioritizes long-term currency strength and economic resilience alongside inflation control—an issue likely to shape Sri Lanka’s economic trajectory for years to come.