Courtesy The Hindustan Times

Sri Lanka’s inflation is expected to significantly cool in the coming months after peaking near 70% this year, and the nation may gradually relax a currency band as inflows improve, central bank governor Nandalal Weerasinghe said.

Sri Lanka’s Central bank governor Nandalal Weerasinghe expects that the country’s inflation will substantially decrease in the coming months with gradual relaxation in currency band as inflows improve. This positive prediction comes after the nation saw inflation rising to massive 70% earlier in the year.

Consumer price gains will continue on the disinflation path,” Weerasinghe said at a CT CLSA investor forum in Colombo on Monday, Bloomberg reported.Inflation is expected to ease to 4%-5% by the end of 2023 and the central bank’s monetary policy transmission is working, he added. Weerasinghe said, as foreign currency inflows increase, the government can also steadily relax a currency band since the nation requires a flexible exchange rate for inflation targeting.

Weerasinghe claimed, The central bank has more space now with monetary aggregates coming down,” and hoped 2023 will be a year of recovery for Sri Lanka.”

He said the monetary authority wants to persuade lenders to bring down market rates as inflation eases. The central bank will support the liquidity stresses of lenders induced by a contracting economy.

Ease in inflation

The island nation has raised borrowing costs by 950 basis points this year, taking the key rate to 15.5% as inflation swelled to become Asia’s fastest.

However, Sri Lanka’s inflation slowed in October for the first time in a year as availability of food and fuel improved. The consumer price index in capital Colombo came down to 66% from a year ago. It was considerable drop compared to 69.8% in September and a median of 68.5% in a Bloomberg survey.

Sri Lanka’s rupee, though, fell to the lowest in over six months on Monday, falling 0.7% to 369.59 per dollar.

Future challenges for Sri Lankan economy

Weerasinghe said that the next necessary step is to complete its debt restructuring. Local authorities are currently advancing talks with Paris Club and non-Paris Club members, he added.

The troubled nation wants to secure the International Monetary Fund’s board consent for a bailout programme in January, said the governor, adding that an immediate deadline of December may be tight.

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Sri Lanka could rebuild its reserves with the IMF program and it can also drive lending by the World Bank and Asian Development Bank. Sri Lanka has got successful in a preliminary agreement with the International Monetary Fund (IMF) for a loan of about $2.9 billion.

Sri Lanka’s foreign exchange reserves stumbled to $1.70 billion at the end-October, from $1.77 billion the preceding month, as the government used it to pay for food and fuel.

(Inputs from Bloomberg)