Recession

Stagflation in Sri Lanka? Risks and Policy Responses

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.

‘A Brewing Storm’: Economic Impact of COVID-19 on Sri Lanka

Over a quarter of the world’s population is currently under movement restrictions. For the first time in recent human history, coronavirus has shattered the myth that the economy must come first. While public health concerns, undoubtedly, should take precedence over all other considerations when dealing with the COVID-19 pandemic, it would be unwise to ignore the economic costs of the current situation. Small economies such as Sri Lanka, in particular, whose economic backbone is made up of micro, small, and medium sized enterprises (MSMEs), dependent on export revenue for foreign currency generation, and is simultaneously managing a critical debt and fiscal crisis, are going to be particularly vulnerable.