Sri Lanka’s consumer inflation drops to 2.5 per cent in March

Sri Lanka’s consumer price inflation dropped to 2.5 per cent in March from 5.1 per cent in February, official data showed on Monday, as the impact of a higher sales tax needed to meet targets set under a $2.9-billion IMF programme receded.

The National Consumer Price Index (NCPI) captures broad retail price inflation and is released with a lag of 21 days every month.

The decrease was largely driven by a 22 per cent cut in power tariffs last month for households, ensuring prices in the non-food category rose only 0.7 per cent in March versus 5.1 per cent in February.

Food prices stayed unchanged at 5 per cent in March from February on the year, the Department of Census and Statistics said in a statement.

“We are hoping that for the next three months inflation will remain below the target level of 5 per cent,” said Shehan Cooray, head of research at Acuity Stockbrokers.

Sri Lanka racked up record high inflation that peaked at 70 per cent in September 2022 after its economy was pummelled by the worst financial crisis in decades, triggered by a plunge in foreign exchange reserves.

The Indian Ocean nation secured a $2.9-billion bailout from the International Monetary Fund (IMF) last year, helping to temper inflation, boost state revenues, and rebuild foreign exchange reserves after its economy crumbled in 2022.

The World Bank raised its forecast for Sri Lanka’s economy by 0.5 per cent this month, projecting growth of 2.2 per cent for 2024.

“We expect growth to be higher, possibly about 3 per cent, as the last quarter of 2023 grew by 4.5 per cent,” Cooray added.

Slowing inflation has also prompted the Central Bank of Sri Lanka (CBSL) to cut policy rates by 700 bps since last year to help the economy return to growth.

Earlier Sri Lanka’s statistics office said that inflation had slowed to 0.9 per cent in March, the lowest year-on-year price increase since an unprecedented economic crisis.

The island nation defaulted on its $46 billion foreign debt in April 2022 after a foreign exchange wipeout left it unable to import food, fuel and other essentials.

This month’s inflation reading, from the benchmark Colombo Consumer Price Index, is a huge drop from the peak of nearly 70 per cent in September of that year.

The central bank this week cut its benchmark lending rate from 10 per cent to 9.5 per cent — the first reduction in four months — in a measure it said would boost “the ongoing revival of economic activity”.

Months of protests during the economic crisis led to the ouster of then-president Gotabaya Rajapaksa when demonstrators stormed his residence.

His successor Ranil Wickremesinghe has sharply raised taxes, cut energy subsidies and secured a $2.9 billion rescue package from the International Monetary Fund.

Both Wickremesinghe and the IMF have said the South Asian nation was “gradually” emerging from the crisis following the austerity measures.

The International Monetary Fund (IMF) and Sri Lanka have reached recently a staff-level agreement on economic policies to conclude the second review of a four-year bailout programme, the global lender said. The review, once approved by the IMF’s board, will release $337 million in funding for the island nation.

Sri Lanka defaulted on its overseas debt in May 2022 after a severe shortage of foreign exchange reserves triggered the worst financial crisis since independence from Britain in 1948.

It has since made progress on about $11 billion of bilateral debt restructuring and hopes to have agreements in place with all key creditors, including bondholders, by May at the latest, Foreign Minister Ali Sabry told Reuters last month.

Sri Lanka is optimistic about reaching an agreement soon with bondholders to restructure about $12 billion in debt, a top official said earlier, a big step that will help the island nation emerge from its worst financial crisis in decades.

China, the world’s and Sri Lanka’s biggest sovereign creditor, pledged to support the island nation to take forward its debt restructuring plan during Sri Lankan Prime Minister Dinesh Gunawardena’s visit to Beijing last month.

Sri Lanka held talks with bondholders in London last week.

“We are optimistic we will come out with a positive outcome,” State Finance Minister Shehan Semasinghe said, without elaborating on the details of the negotiations.

Sri Lanka defaulted on its overseas debt in May 2022 after a severe shortage of foreign exchange reserves triggered the worst financial crisis since independence from Britain in 1948.

The Indian Ocean island nation eventually secured an agreement in principle with China, India and the Paris Club nations last November and now needs agreements with each of the bilateral creditors — a key condition in its bailout package from the International Monetary Fund (IMF).