The emergence of a low-growth international environment together with a significant rise in inflation has raised concerns of stagflation; a period of low growth combined with high inflation. A global stagflationary environment can worsen Sri Lanka’s current economic crisis restricting growth and increasing inflation. Increased policy rates to combat inflation will result in lower investments. These factors, combined with political instability, lower-than-expected remittances, and lower productivity due to acute shortages of essential items will further constrict the Sri Lankan economy, pushing it into stagflation. Due to a global economic downturn, rising commodity prices and high rates of borrowing, Sri Lanka can expect a challenging external sector environment next year. Policymakers will need to understand these global challenges and make pragmatic economic decisions to minimise further damage to the economy.
Global oil prices are in the headlines once again with crude oil prices soaring following Russia’s invasion of Ukraine on 24 February 2022. Global crude oil prices have shot up; the Brent increased by around 22% to USD 114 a barrel at the end of May 2022, from a low of USD 93 a barrel in early February 2022. The volatility of global oil prices has worsened Sri Lanka’s economic woes. This blog discusses the main drivers of oil prices, the effects of price volatility on the Sri Lankan economy and outlines some policy options available to mitigate the adverse effects of oil price fluctuations.