Sri Lanka is now facing a hyperinflationary situation with the country’s inflation hitting a new high of 54.6 per cent in June, several leading economists said referring to the Central Bank’s latest announcement of the official economic indicator data.
The Sri Lankan rupee depreciated more than 50 per cent against the dollar this year compelling the Monetary Authority to stabilise its inflation-ravaged rupee and it is opting to withdraw certain currency notes of low value from circulation.
The Business Times in its article on economic disaster published on March 27 predicted that soaring inflation will lead to hyperinflation in the country exerting pressure on the people already struggling with shortages and suffering in the economic chaos.
This critical situation has now emerged as the prices of goods and services rise uncontrollably almost daily, University of Colombo Prof. in Economics Sirimal Abeyratne disclosed.
He added that in general, the term hyperinflation is used when the rate of inflation increases at more than 50 per cent a month. Typically, hyperinflation is triggered by a very quick growth in the money supply.
This could be caused by government printing money to pay for its spending or what is known as demand-pull inflation. The latter happens when the increase in demand exceeds supply, making prices higher due to a shortage in goods and services, he explained.
The Central Bank was managing the situation when they were resorting to inflation targeting and money supply controlling during 2018-2019 period on the directions of the International Monetary Fund.
But the inflation targeting has gone haywire following the Monetary Authority’s inclination towards Modern Monetary Theory in 2020 where the Central Bank printed historic volumes of money exerting severe pressure on the rupee triggering the worst import and exchange controls since the 1970s.
He pointed out that when more money is pumped into circulation, the real value of the country’s currency can plunge.
Therefore, when measured in terms of the impact on people’s lives, hyperinflation can be devastating with prices of essential goods can rise on a daily basis.
The Monetary Authority will have to focus on core issues in a comprehensive plan to address the causes of the hyperinflationary situation to tackle runaway inflation, which has considerably weakened the local currency, he suggested.
The country will have to correct inconsistent and wrong economic policies while controlling the money printing only to match the value of overall money transactions in the economy, he emphasised.
A shortage in essential commodities in the market and ever increasing prices should be tackled while addressing the supply chain disruptions; he said adding that the depreciation of the rupee and domestic policy issues will have to be settled within a short period.
Under this set up the value of acceptance of the Sri Lanka rupee could be diminished soon and this was clearly indicated with the drop in value of the Rs. 5000 note as people cannot even buy a cup of tea with Rs. 20 or even Rs 50, Senior Professor of the Business Studies Faculty of the North Western University Aminda Methesila Perera said.
Rs. 10, 20, 50 notes will be out of circulation soon compelling the Central Bank to print new high value currency notes following the ever-increasing amount of rupees to be paid for the dollar, he claimed.
It was the first time that the increase in the Colombo Consumer Price Index (CCPI) crossed the psychologically important 50 per cent mark, according to the Department of Census and Statistics.
As a result, prices of essential items are increasing sky high daily with the Petrol price hike to Rs.470 per litre from Rs.420 and short distance bus fare increase to Rs 40 from Rs 12.
The people’s buying power has come down drastically as they now buy five kg of samba rice at the price they have bought 10 kg of the similar variety of rice one year ago.
“Under such a situation, a large amount of money is needed to buy goods and services and meet other payment obligations,” he said.
Sri Lanka will be compelled to stop money printing and introduce new currency or to tie up with a basket of currencies in the long run, he said adding that this is in the pipe line.
The Sri Lankan authorities and the Reserve Bank of India are contemplating setting up a dedicated payment mechanism with Sri Lanka to enable Indian exporters to collect payments in Sri Lankan rupees as the country struggles with a worst economic crisis, a senior Finance Ministry official said.
Under the mechanism, Sri Lankan importers will be allowed to pay for goods to Indian banks in Sri Lanka, and the banks, in turn, would make the payment in Indian rupees to exporters, he disclosed.
It will facilitate Sri Lanka to import goods from India as the country’s foreign reserve is dwindling, making it impossible to import essential commodities including food and fuel.
