Inflation in Sri Lanka will peak at around 70% in the next two months before starting to ease in September this year, according to central bank governor Nandalal Weerasinghe.
The national consumer price index rose 45.3% year-on-year in May – a sharp increase compared to 33.8% in April, according to government data. Food inflation also rose, jumping 58% year-on-year in May compared with 45.1% in April, the data showed.
Maintained that his calculations had factored in an “adjustment” to higher energy prices, the Governor of the Central Bank of Sri Lanka told CNBC’s “Street Signs Asia” on Thursday that the country is eligible for an “Extended Fund Facility” from the International Monetary Fund of $3 billion over three years.
The EFF was created to help countries with serious payment imbalances.
Sri Lanka is in the midst of an economic crisis, the worst since independence in 1948.
After defaulting on its foreign debt, the country now faces fuel shortages and social unrest as angry protesters stormed the presidential palace last week. President Gotabaya Rajapaksa fled the country after being forced to resign, paving the way for Ranil Wickremesinghe to be elected president.
Protesters who stormed Sri Lanka’s presidential palace in Colombo earlier this month will have to deal with inflation reaching 70% before it subsides later this year, according to the country’s central bank governor.
– | Afp | Getty Images
When the IMF begins disbursing money under what will be Sri Lanka’s 17th IMF program, other institutions such as the World Bank and the Asian Development Bank will supplement those funds with another $4 billion, according to the central bank governor.
He said the current economic crisis is an opportunity for Sri Lankan authorities to learn from past mistakes and not reverse reforms when the IMF program ends.
“Only when [program] is over, we have seen the authorities move back and reverse good policy,” he said.
“This is, for me, an opportunity for… the authorities to learn a lesson and move in the right direction, even beyond the IMF program. That is the key for us to manage this economy on a sustainable basis,” the central banker said .
He admitted that while it is important to have a social safety net in place for the poor and disaffected, he said the root cause of the current economic crisis lies in decades of fiscal mismanagement.
“[The] the government has run large fiscal deficits of around 8% to 9% for long periods,” he said. “As a result, we have … a very high level of public debt [which] has become unsustainable.”
A reform-friendly president
Weerasinghe is optimistic that reforms will be implemented under Wickremesinghe, who was elected as the new president on Wednesday. He described him as a “strong supporter” of economic reforms, pointing out that the new president had been involved in negotiations with the IMF.
“I hope that this commitment will continue… the sooner the better, so that we can reduce the time of the pain we are experiencing now,” he said.
The central banker predicted that the problem of low foreign reserves will continue for “the next few months” until an agreement is reached with the IMF. He also said that Sri Lanka is negotiating credit lines with several friendly countries such as India, Japan, China and Bangladesh, among others.
However, he dismissed reports that Sri Lanka had fallen into a “Chinese debt trap”.
China has financed major infrastructure development in Sri Lanka, providing loans over the past decade on terms often described as opaque by some observers. In an oft-cited example, Sri Lanka was forced to lease the Hambantota port to a Chinese company for 99 years after failing to make repayments.
“I don’t agree with the concept…[of] be captured by China,” the banker said, adding that China has “invested and helped” Sri Lanka for a long time. “That’s why we have some debt with China.”
He insisted that these projects were “very good” and have “tremendous potential.”