Fiscal Policy

Sri Lanka’s Runaway Inflation and the Limits of Monetary Policy

Having kept monetary policy too loose for too long, Sri Lanka started its tightening cycle in August 2021. It signalled firm intentions to regain the Central Bank of Sri Lanka’s (CBSL) focus on price stability by engineering a reduction in demand through high interest rates and withdrawing liquidity from the economy. Effectively, in the current dire growth outlook for Sri Lanka, the policy intention means forcing a recession to tame inflation. In choosing between the options of an aggressive hike that will lead to a recession or tolerating a prolonged inflationary spiral bordering on hyperinflation, the former is preferable. Once inflation takes hold, the damage can be corrosive, especially its deeply regressive impacts on lower income households. But a contractionary strategy to suppress demand will not achieve the desired outcomes if (a) inflation expectations are not well anchored and people expect rapid price increases to continue, and (b) supply side factors remain unaddressed.

Sri Lanka’s Debt Overhang: Getting Better, or Worse?

The Sri Lankan economy appears to be suffering from a growing debt crisis and is facing a risky external sector outlook in the near term. According to Central Bank’s 2016 Annual Report, the total general government external debt has grown by 10% in 2016 to US$ 27.2 billion. This article by Dushni Weerakoon analyses whether Sri Lanka is making progress in terms of getting its debt overhang under control.

Sri Lanka’s Extended Fund Facility Arrangement with the IMF: It’s Mostly Fiscal

This article takes a look at Sri Lanka’s status and what the country needs to do with regard to its economy, in terms of the IMF Programme.