Business

Stagflation in Sri Lanka? Risks and policy responses

Published

3 years ago

2022/08/12

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)

All News Advertisement

Business

Sri Lanka’s 2.3% inflation is a useful macro indicator, but it acts as a veil, says analyst

Published

5 hours ago

2026/02/2

Thilina Walpola

Inflation projections made at the monetary policy round in January 2026 indicate a gradual acceleration of inflation towards the target of 5% by the second half of 2026, with the support of appropriate policies.

Disconnect between national statistics and household sentiment illustrated

Although official data points to a stable headline inflation rate of 2.3%, an independent economic analyst told The Island Financial Review that the public should look beyond this single figure.

Speaking on condition of anonymity, the analyst said, “That 2.3% is a crucial macroeconomic indicator for policymakers, but for the average household, it acts more like a veil. It obscures the sharply different economic realities in different sectors of the economy and, consequently, in different people’s lives.”

“You see, the aggregate is an average, a blend of everything from falling transport costs to soaring medical bills. But no family buys the ‘average’ basket. Your personal inflation rate is dictated by your unique spending pattern, and right now, those patterns are creating winners and losers in a low-inflation environment.”

He illustrated this by taking three contrasting Sri Lankan households.

“Consider a retired couple: their budget is dominated by healthcare, which is inflating at 4.2%, and perhaps occasional treats at restaurants, up 4.0%. For them, the cost of living is rising nearly twice as fast as the headline suggests. That 2.3% figure is of poor comfort to them.”

“Conversely, take a young professional who commutes; they are a direct beneficiary of the 0.9% deflation in transport. Their major expenses – fuel and vehicle maintenance – are supposed to be getting cheaper. Even if education inflation is high, it doesn’t affect them. This individual might feel almost no pinch, experiencing a personal inflation rate of about 1%. The headline number overstates their hardship.”

The analyst expressed his deepest concern for the typical family. “This is where the veil is most dangerous,” he said. “A family with school-going children is hit from multiple sides: Education at 3.9%, daily groceries at 3.3%, and clothing at 3.6%. The slight relief from cheaper transport is negligible against these heavy, non-negotiable expenses. Their budget is being squeezed relentlessly, a pressure the calm 2.3% aggregate completely masks.”

The analyst concluded that this sectoral divergence explains the disconnect between national statistics and household sentiment.

“When people hear ‘inflation is low and stable,’ but feel their wallet straining, it’s not ignorance. It’s because their personal basket is heavy with the sectors that are heating up – essential services, education, and food. The 2.3% is a useful indicator for the economy at large, but it should not blind us to the fact that many families are experiencing a much harder personal financial reality. Lifting that veil is key to understanding the true cost of living.”

by Sanath Nanayakkare

Business

Sri Lanka explores climate finance after Cyclone Ditwah

Published

5 hours ago

2026/02/2

Thilina Walpola

SLYCAN Trust convenes key forum on loss and damage funding

As Sri Lanka seeks funds as a climate-vulnerable nation, SLYCAN Trust convened a High-Level Forum on Climate Finance and Climate-Related Extreme Events in Colombo on January 20, 2026. The forum focused on improving access to finance for recovery and resilience, particularly following the severe impacts of Cyclone Ditwah in late 2025.

Dennis Mombauer, Director of Research and Knowledge Management at SLYCAN Trust, emphasised the urgency of building long-term resilience and addressing loss and damage.

“This Forum convenes key actors to identify pathways for accessing finance and managing climate risks,” he stated.

In a virtual keynote, Mathilde Laurans, Deputy Executive Director of the Fund for Responding to Loss and Damage (FRLD), announced that the fund opened its first call for proposals on December 15, 2025, with submissions accepted until June 15, 2026. “This milestone means that countries like Sri Lanka can now engage with us for support,” she said.

K.K.A. Chamani Kumarasinghe, Additional Director at Sri Lanka’s Climate Change Secretariat, highlighted the extensive damage caused by Cyclone Ditwah and stressed the need to strengthen response systems. She commended SLYCAN Trust for creating platforms that connect global climate processes with national priorities.

The forum included panel discussions with representatives from international climate finance institutions and technical experts, focusing on practical steps to enhance Sri Lanka’s climate resilience and improve local-level access to finance.

Business

Browns Hotels & Resorts brings a century of tea heritage to life at Newburgh Ella

Published

5 hours ago

2026/02/2

Thilina Walpola

The ribbon cutting marking the official opening of the resort

In the mist-veiled heart of Sri Lanka’s hill country, where Ella has earned global recognition as one of the island’s most photographed destinations, Browns Hotels & Resorts introduces a new chapter in experiential hospitality with Newburgh Ella – The Tea Factory Resort. Once a working tea factory, the century-old estate, originally established in 1903 by the legendary Scottish tea planter George Thomson, has been carefully transformed into a luxury resort, preserving its industrial character and historical soul while elevating it into an immersive experience. Set against dramatic mountain backdrops and defined by its iconic orange chimney, the resort commands world-famous views of the Ella Gap, framed by Ella Rock and Little Adam’s Peak — where landscape, legacy, and luxury converge.

On 30 January 2026, Newburgh Ella officially opened its doors to travellers from around the world with a ceremonial launch attended by Eksath Wijeratne, CEO of Browns Hotels & Resorts; Gangadaran Velsamy, General Manager of Newburgh Ella; Priyal Perera, Head of Projects and Procurement; Nishad Rajapakse, Manager – Engineering; along with key officials from Browns Hotels & Resorts. The event featured traditional regional performances and a ceremonial presentation of the first keycards to Newburgh Ella’s inaugural guests by the resort staff.

This unveiling marks the soft opening of Newburgh Ella, with the property currently progressing through its LEED and green certification processes. As part of its sustainability journey, the resort operates on a fully paperless concept, with digital check-in and digital menu systems in place, reinforcing Browns Hotels & Resorts’ commitment to responsible and future-ready hospitality.

Located on the Ella–Passara main road, near the Nine Arch Bridge and Pekoe Trail, Newburgh Ella features 41 thoughtfully designed rooms, categorised as Silver, Gold, and Bronze — inspired by the hierarchy of tea tips. The resort includes special family rooms, exquisite suites, and full wheelchair accessibility, offering inclusivity without compromise. Guests can witness sunrises and sunsets unfold directly from their rooms, framed by emerald vistas, connecting them to the rhythm of the hills.

Dining at Newburgh Ella celebrates the estate’s relationship with tea, land, and craft. 1903 – The Dining Room offers all-day dining with local and international flavours. Eastern Valley, an open-air restaurant, presents Pan-Asian cuisine, while Three Tips, the tea lounge, invites guests to savour the estate’s finest teas. The resort’s bar, George Thomson – The Founder’s Tavern, features specially curated beverage menus inspired by the region, reflecting the warmth of Browns hospitality. Together, these experiences offer the luxury of tea factory living, blending heritage, craft, and modern comfort.

Beyond its spaces, guests can explore Ella through curated experiences — from estate walks and visits to Ravana and Diyaluma Falls to scenic railway journeys. SKY, the resort’s observation deck, offers breathtaking vistas over tea-carpeted valleys and the world-famous Ella Gap.

Commenting on the launch, Eksath Wijeratne, CEO of Browns Hotels & Resorts, said:

“Tea is one of Sri Lanka’s most powerful global stories, and with Newburgh Ella, we wanted to honour that legacy while creating an experience that goes beyond aesthetics. Guests can connect with the very process, the people, and the land that give Sri Lanka tea its global recognition. At the same time, this project supports the local community, with many former factory staff now part of the resort team, ensuring heritage, sustainability, and hospitality thrive together.”

With the unveiling of Newburgh Ella – The Tea Factory Resort, Browns Hotels & Resorts continues to expand its portfolio of story-led destinations across Sri Lanka, inviting travelers to experience tea country differently — where the finest grade of tea meets the finest grade of stay, steeped in history, character, and heart.

: A Gold Tip Room at Newburgh Ella with a private balcony

: Eksath Wijerathne, Chief Executive Officer with Priyal Perera, Head of Projects and Procurement with Gangadaran Welasamy unveiling the property signage for Newburgh Ella