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Stagflation in Sri Lanka? Risks and policy responses

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4 years ago

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By Binura Seneviratne

The world economy is showing signs of a serious slowdown due to overlapping crises including the Russia-Ukraine War, the COVID-19 pandemic, China’s real estate crisis and the global tightening of monetary policy.

In June, the World Bank revised the 2022 growth prediction downward to 2.9% from its January forecast of 4.1%. The slowdown has come along with a decade-high bout of inflation worldwide with the global median Consumer Price Inflation (CPI) inflation rising to around 7.8% on a year-on-year (YoY) basis, the highest since 2008, according to April 2022 data (Figure 1). 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.Monthly CPI Inflation, Year-On-Year The Effects of Stagflation

A global stagflationary environment could further weaken global economic growth while increasing inflation. To combat inflation, many central banks including the US Federal Reserve, the Bank of England and the European Central Bank have resorted to monetary tightening measures. The rise in global interest rates as a direct attempt to anchor inflation expectations will further subdue economic growth thereby increasing borrowing costs globally. This results in a downward economic cycle as rising borrowing costs will reflect in lower investments. The effects for developing countries could be more pronounced as inflation will hit the poorest and the marginalised the most. Weak global growth will decrease export income in these markets while higher global commodity prices will increase import expenditure leading to macroeconomic imbalances.

Risks for Sri Lanka

A global stagflationary environment can worsen Sri Lanka’s current economic crisis restricting growth and increasing inflation. Higher global borrowing costs will be detrimental to Sri Lanka’s future growth when the country resumes international borrowing once an IMF agreement is in place. The rise in commodity prices could further increase the country’s worsening food insecurity, with the World Food Programme reporting that 25% of the population is food insecure. Higher commodity costs will also increase import expenditure while lower global demand could reduce export revenue thus expanding the current account deficit. However, if global inflation is transient, the effects on the current account would be ambiguous. The global economic downturn will spark lower demand for commodities such as oil which could lower import expenditure but also reduce the demand for Sri Lankan exports.

Due to rising inflation and lower growth, the Sri Lankan economy is approaching stagflation. Growth expectations for the country have nosedived after the sovereign default with the economy projected to decline by -7.8% in 2022 and -3.7% in 2023 according to the World Bank. The combination of a myopic “organic” agricultural policy, the inflation pass through from the depreciation of the Sri Lankan Rupee by 80%, an expansionary monetary policy and global market conditions have resulted in inflation surging to 59% in June (YOY) (Figure 2).

Consumer Price Inflation (Jan 20 – May 22)

The tightening global economic conditions along with domestic supply-side factors such as shortages in food and fuel will continue to drive inflation in the country. 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.Change in Policy Interest Rates of the Central Bank of Sri Lanka Policy Options

Sri Lankan policymakers are constrained within this economic environment. The country will need to impose austerity measures to receive an extended fund facility from the IMF. These measures will include tax reforms to increase government revenue, curtailing non-essential government spending and reducing subsidies. While a fiscal stimulus package is out of the equation, the country needs to target the most vulnerable groups in providing emergency subsidies, as rising inflation and job losses have led to lower standards of living, especially among the vulnerable segments of the population. Due to financing constraints, Sri Lanka will have to look for further bilateral and multilateral aid in securing funding for short term, targeted “in-kind” transfers such as food stamps. It is also imperative to have a bridge financing arrangement, to import essential commodities like fuel, so that supply shortages reduce. This should help in keeping productivity intact and inflationary pressure in check.

Monetary tightening should also continue. The CBSL hiked interest rates by 700 basis points in April this year. Interest rates were increased by another 100 basis points in July to control the rising inflation (Figure 3). Monetary policy decisions need to be communicated very clearly so that there is a stronger anchoring of inflation expectations. Anchored inflation expectations would limit a wage-price spiral to control inflationary pressure so that production costs do not rise further. 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.

Link to the blog https://www.ips.lk/talkingeconomics/2022/08/10/stagflation-in-sri-lanka-risks-and-policy-responses/

Author

Binura Seneviratne is a Research Officer working on macroeconomic policy, poverty and social welfare research at IPS. He holds a Master of Economic Policy from the Australian National University and a BSc in Economics and Finance from the University of York. (Talk with Binura: binura@ips.lk)


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Commercial Bank scales up ADB credit line to empower Jaffna SMEs

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11 mins ago

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2026/09/28

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Empowering Regional Enterprise: ADB Country Director Shannon Cowlin (right), T. Thivaharan, Manager of Commercial Bank’s Manipay Branch (center), and P. Prabakaran, Proprietor of New V.S.P. Gingelly Oil (left),at the production facility in Sandilipay, Jaffna (415 km north of Colombo). The visit highlighted how targeted ADB-backed financing helps local small and medium-sized enterprises overcome financing barriers, upgrade operations, and stimulate employment across regional supply chains.

By Sanath Nanayakkare

Continuing its mission to drive inclusive economic recovery and empower Sri Lanka’s grassroots business sector, the Commercial Bank of Ceylon PLC has actively accelerated the disbursement of the Asian Development Bank’s (ADB) Enhancing Small and Medium-Sized Enterprises Finance Project line of credit.

As Sri Lanka’s premier private sector lender, Commercial Bank drives regional development by bridging financial gaps outside the Western Province. Jaffna and the broader Northern Province remain pivotal focus areas due to their immense potential for industrial regeneration, vibrant agricultural output, and entrepreneurial resilience in the post-crisis economic landscape.

Directing targeted, affordable financing enables local enterprises to overcome historical financing barriers, expand production capacity, and stimulate employment across regional supply chains.

Quality at the Source: ADB Country Director Shannon Cowlin inspects a bottle of premium sesame oil at the New V.S.P. Gingelly Oil factory floor in Jaffna. Working capital facilities extended through Commercial Bank under the ADB line of credit enable manufacturers like Harish Industries to meet growing wholesale and retail demand across Sri Lanka while securing long-term economic resilience.

The dedicated credit scheme offers affordable interest rates to help small and medium-sized enterprises (SMEs) rebound from recent macroeconomic shocks, maintain employment stability, and build long-term sustainability. Designed to target underserved segments, the funding line prioritizes viable enterprises located outside the Colombo district, women-owned and women-led businesses, and ventures incorporating strong climate finance components. Eligible sectors span manufacturing, agriculture, animal husbandry, technology, tourism, and direct export industries.

A standout beneficiary showcasing the transformative impact of this regional focus is Harish Industries, a flourishing manufacturing firm located within the purview of Commercial Bank’s Manipay branch in Jaffna. Owned and operated by proprietor Ponnuchamy Prabakaran, Harish Industries manufactures premium sesame oil under the popular brand name “New VSP Gingelly Oil”.

The working capital facility extended by the line of credit to Harish Industries helped to cater to short-term liquidity needs, ease out cash flow pressure, and operate the business in a sustainable manner.

Additionally, this financial backing helped create more employment opportunities, strengthen its supply chain, and expand business operations to meet growing wholesale and retail demand across Sri Lanka.

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A tech-savvy new generation stepping in to reinvent Sri Lankan hospitality

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24 mins ago

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2026/09/28

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When the final twelve champions took the stage for their honours, the event shifted from a mere ceremony into a profound symbol of tomorrow

The grand halls of the Taj Samudra in Colombo buzzed with a distinct energy on the morning of September 25, 2026, as leaders gathered for the National Celebration of World Tourism Day.

Yet, beneath the formal discussions on digital agendas and artificial intelligence, a deeper, more vibrant narrative was quietly unfolding. This was not merely a story of algorithms and automated efficiency; it was a human story – a tale of Sri Lanka’s youth stepping forward to redesign the future of hospitality.

For generations, Sri Lanka’s allure has been rooted in its timeless landscapes, golden shores, and the legendary warmth of its people. But as global travel evolves, a new generation of tech-savvy local innovators is finding ways to weave cutting-edge technology into the rich tapestry of Sri Lankan culture. This shift took center stage during the Tourism Start-Up Competition 2026, held under the theme “AI-Driven Innovation for the Future of Tourism”.

Out of 52 competitive applications spanning tertiary and commercial levels, young minds proved that technology and tradition can go hand in hand.

The twenty-five shortlisted teams stood before expert panels to defend visions that bridge the gap between ancient heritage and modern data intelligence.

Behind every submitted AI solution was a young entrepreneur eager to protect local destinations, enhance visitor experiences, and elevate service delivery.

When the twelve winners were finally honoured, the celebration transformed into something much greater than an awards ceremony.

It served as a powerful reminder that the true engine of Sri Lanka’s digital transformation is its youth. Armed with code, creativity, and a profound love for their country, these young visionaries are ensuring that when travelers explore Sri Lanka, they do not just witness the future – they feel the heartbeat of a new, digitally empowered era of hospitality.

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IRD enforces mandatory TIN certificate submission for specified transactions starting November 01

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24 mins ago

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2026/09/28

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The Inland Revenue Department (IRD) has announced a sweeping regulatory shift, confirming that the submission of a valid Taxpayer Identification Number (TIN) Certificate will become mandatory for a wide range of essential financial, commercial, and property transactions starting November 1, 2026.

The decisive directive, enforced under the legal framework of the Inland Revenue (Amendment) Act, No. 11 of 2026, applies directly to individuals specified under Section 102(3) of the principal Inland Revenue Act.

Under the new mandate, relevant authorities and corporate entities across the island have been instructed to withhold processing or completion of key procedures unless applicants present a verified TIN document. The specified transactions include:

Financial Services: Opening any account at a bank or financial institution, and obtaining a credit card.

Property and Construction: Obtaining approval for building plans, and registering land or titles to land.

Automotive Administration: Registering a motor vehicle or renewing a motor vehicle license.

Commercial Activity: Registering a new business.

Corporate Transfers: Transferring shares of a company incorporated in Sri Lanka—a requirement binding on both the transferor and the transferee.

The IRD has reiterated that acquiring a TIN remains a statutory obligation for all resident individuals who were aged 18 or older as of December 31, 2023, as well as those who attain the age of 18 on or after January 1, 2024, upon reaching that milestone. Officials handling the designated services have been sternly directed to verify compliance before moving forward with any customer requests.

To streamline the transition and prevent administrative bottlenecks, the department has encouraged members of the public who have not yet secured their numbers to register promptly via the official IRD e-Services platform. Furthermore, recognizing potential logistical hurdles, the IRD noted that a printout of the online TIN verification result—clearly displaying the applicant’s National Identity Card (NIC) number and TIN—will be accepted as a valid alternative to the official certificate.

As the November 1 deadline approaches, citizens are urged to secure their documentation beforehand to ensure uninterrupted access to essential public, financial, and legal services.

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