Sri Lanka’s economy is likely to contract more than 8 percent in 2022 and inflation may peak below 70 percent, central bank governor Nandalal Weerasinghe said.
“According to an earlier projection, we thought economic contraction would be 7.5 percent. And it looks like it will be a little more like that and it will probably pass 8 percent this year,” governor Weerasinghe told reporters after holding the policy rate at 15.50 percent but market rates around 25 to 30 percent.
Weerasinghe said at a discussion on Thursday August 15 that the sharper the economic contraction is, the faster the recovery will be.
“If there is a sharper negative growth this year means, we should be able to recover in next year, mainly in the second half,” he said.
Adding that uncertain factors such as changes in global prices of goods and services can affect the situation, Weerasinghe said if Sri Lanka manages to maintain normal economic conditions at current levels, sectors such as tourism will recover faster.
“Due to the decisions we took in the recent past, we see a favorable result now. Especially last time we saw a possibility of inflation rising more than 70 percent. But now we see it won’t go that high and with the electricity tariff being increased we have the hope it will come down going forward,” said Weerasinghe.
“On the other hand, our forex crisis has gotten better than the last time. We have been able to allocate forex for essential items likes petrol, diesel, and medicine due to the decisions we took. Import cost has reduced and exports have increased to a satisfactorylevel.
He said Sri Lanka is at a level of taking care of the basic needs of the country without going for short term loans.
Sri Lanka had to raise rates to stop private credit, reduce outflows and restore the credibility of a peg which was broken by two years of money printing.
As a result of high interest rates, credit growth should be decelerating. There is a purpose of having high interest rates. That is to decelerate private sector credit and reduce the growth in private sector credit, reduce monetary expansion, and then curtail the inflation, said Weersinghe.
There is a strong correction of the external sector with slowing private credit and also inflation.
Sri Lanka’s inflation grew 60.8 percent in the 12 months to July 2022, in the wake of failed float of the currency after two year of money printing, official data showed.
Governor Weerasinghe said inflation may peak around September below 70 percent before showing a downward trend.
“Inflation will be going up until September and we will see a downward trend after that. This is an assumption and no one can say how much it will be exactly. It will certainly increase gradually to around 70 percent. But we can’t give an exact number,” he said.
“Earlier it was projected to go to around 70 percent but I do not think it will reach that level now. It will peak around 65 and it will trend down,” he said.
Source: Economy Next