ECONOMYNEXT – Sri Lanka’s inflation fell 2.1 percent in the 12-months to November 2024, while the index fell back to September 2022 levels, official data showed, amid deflationary policy and currency appreciation by the central bank.
The Colombo Consumer Price Index (re-based) fell to 0.3 points during the month of November 2024 to 189.4 point which is around the 189.3 points September 2022.
After rate cuts enforced by inflationary open market operations triggers a currency crisis and draws the International Monetary Fund, pegged currencies are usually not encouraged to appreciate based on a Mercantilist doctrine called ‘competitive exchange rates’.
But, the central bank under Governor Nandalal Weerasinghe has allowed the exchange rate to appreciate, boosting disposable incomes and a faster economic recovery and reserve collection.
Under so-called ‘flexible inflation targeting’, interest rates are usually slashed by crisis prone central banks on the claim that 12-month inflation is low using 12-month ‘real interest rates’ which is a statistical or econometric argument.
Governor Weerasinghe however pointed out that inflation was very high over the recent past and the economy was recovering fast and there was no problem with ‘deflation’.
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The central bank’s monetary policy has also allowed electricity and fuel prices to come down.
When the slashed rate is enforced with inflationary open market operations as private credit recovers, currencies come under pressure again in the middle of 4-year IMF program.
Global commodity prices have also started to come down after the US Fed tightened monetary policy from around March 2022, abandoning earlier Mercantilist (cost-push or non-monetary) doctrine that supply chain bottlenecks was the reason behind high inflation.
It the 1960s and 1970s Anglophone macro-economists also printed money through open market operations claiming non-monetary arguments with wage-spiral inflation a key false doctrine. Sri Lanka’s deflation is coming amid wages hike made by some companies to account for tax hikes as well.
The central bank has allowed the exchange rate to appreciate from around 360 to the US dollar in March 2023 after a surrender rule was lifted, to around 291 to the US dollar now.
Sri Lanka’s rupee collapsed in 2022 as a float failed due to the surrender rule.
Deflationary policy itself started to show up in the balance of payments in September 2022 as a reported balance of payments surplus.
The food price index is down 2.1 percent over the past 12 months and 6.0 percent since September 2022.
Sri Lanka got locked into a violent cycle of so-called ‘stop-go’ policies after the IMF gave technical assistance to calculate potential output (growth), while flexible inflation targeting itself was incompatible with a reserve collecting central bank, critics have pointed out.
There have been warnings about early re-emergence of inflationary policy, through easy money given to banks through open market operations on the basis of government liquidity forecasts instead of forcing banks to manage liquidity as part of prudential policy. (Colombo/Nov29/2024)
