Stagflation

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.