Business

Stagflation in Sri Lanka? Risks and policy responses

Published

4 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)

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Business

IMF talks conclude without staff-level agreement as Sri Lanka prepares November Budget

Published

9 hours ago

2026/09/24

Sahan Weerasooriya

Fund says discussions will continue on policies and parameters needed to complete the Seventh Review

By Sanath Nanayakkare

Sri Lanka’s latest talks with the International Monetary Fund (IMF) have concluded without a staff-level agreement on the policies and parameters required to complete the Seventh Review of its Extended Fund Facility (EFF), leaving further discussions ahead as the government prepares its next Budget.

An IMF team led by Mission Chief Evan Papageorgiou visited Sri Lanka from September 10 to 23 for discussions on the Seventh Review and the 2026 Article IV Consultation.

The Fund said the discussions with Sri Lankan authorities had been productive, but would continue in the near term towards reaching agreement on the parameters and policies needed to complete the Seventh Review.

The outcome therefore represents a delay in reaching the formal staff-level milestone rather than a breakdown in negotiations.

The latest mission comes as Sri Lanka moves from economic stabilisation towards longer-term structural transformation, while continuing to face external shocks and domestic fiscal pressures.

The IMF said economic activity expanded by 4.2 percent in the second quarter of 2026, marking the 11th consecutive quarter of growth. At the same time, the Fund cautioned that downside risks remained, particularly amid an uncertain external environment.

Gross official reserves had risen to US$6.9 billion by the end of August, while the banking sector remained well capitalised and profitable, providing some buffers against external pressures.

A major focus of the IMF’s latest assessment was Sri Lanka’s revenue position.

The Fund said developing and implementing a strong medium-term revenue strategy would be critical to sustaining revenue mobilisation and strengthening fiscal resilience.

It stressed the need to broaden the tax base, rationalise tax exemptions and incentives, and strengthen revenue administration and compliance.

The IMF also emphasised the importance of maintaining cost-recovery energy pricing and improving the efficiency and fairness of the tax system in order to reduce fiscal vulnerabilities.

These issues assume particular significance as the government prepares its next Budget, with the authorities seeking to balance revenue mobilisation and fiscal consolidation against the need to sustain economic recovery.

The Fund’s latest position does not indicate that negotiations have broken down. Rather, the IMF has said that discussions will continue towards reaching agreement on the remaining policies and parameters required to conclude the Seventh Review.

The latest talks follow the combined Fifth and Sixth Reviews, for which IMF staff and Sri Lankan authorities reached a staff-level agreement in April, subject to completion of the remaining requirements before consideration by the IMF Executive Board.

For Sri Lanka, the immediate challenge is therefore to preserve the gains made in macroeconomic stabilisation while addressing the remaining issues under the IMF programme and preparing a Budget capable of supporting longer-term fiscal and economic resilience.

With further discussions expected in the near term, the Seventh Review remains a work in progress as Sri Lanka enters another critical stage of its economic reform programme.

Notably, the IMF has yet to publicly specify the outstanding issues that remain to be resolved.

Business

UK digital expertise and Sri Lankan business leaders unite to explore growth through technology

Published

9 hours ago

2026/09/24

Sahan Weerasooriya

British High Commissioner Andrew Patrick

British High Commissioner Andrew Patrick hosted UK digital product consultancy Apadmi at Westminster House, his official residence in Colombo, for an invite-only forum bringing together senior business leaders from across Sri Lanka’s retail, banking, telecommunications, hospitality and public sectors.

The event, “Turning Digital Assets into Growth Engines”, marked Apadmi’s first official event in Sri Lanka since establishing its Colombo office in 2025, and was delivered in partnership with the British High Commission as part of ongoing efforts to strengthen UK and Sri Lanka commercial and technology ties.

Guests were welcomed by High Commissioner Andrew Patrick, followed by a keynote from Niresh Muthuratnanandan, Head of Omni Commerce, Digital & Loyalty at Keells Supermarkets, who spoke about the launch of the Keells Nexus app and the modernisation of a loyalty programme serving 2.9 million members.

A panel discussion followed, hosted by Mark Collin, Chief Growth Officer at Apadmi, and featuring Malik Induruwana, Chief Information Officer at HSBC Sri Lanka & Maldives; Jiffry Zulfer, Founder and CEO of PickMe; Uthpala Pinnaduwahewa of Hatton National Bank; and Marcus Hadfield, Chief Strategy Officer at Apadmi.

The discussion centred on the commercial opportunity created by Sri Lanka’s rapid mobile adoption. According to [source], mobile data usage in the country reached 1.03 million terabytes in Q2 2026, a 31% increase year on year, against 29.4 million mobile subscriptions. With 71% of devices now smartphones or tablets, speakers discussed how Sri Lankan businesses could convert growing digital engagement into customer loyalty, new revenue and operational efficiency.

British High Commissioner Andrew Patrick said:

“It was a pleasure to welcome Apadmi and such a strong group of business leaders to Westminster House for this event. The UK and Sri Lanka have a longstanding partnership, and digital innovation is an increasingly important part of that relationship. Apadmi’s decision to establish a base in Colombo reflects the confidence that UK companies have in Sri Lanka’s digital economy, and I look forward to seeing this partnership continue to grow to the benefit of both our countries.”

Mark Collin, Chief Growth Officer at Apadmi, said:

“Being hosted by the British High Commission was a real privilege, and a fitting way to mark the next stage of our commitment to Sri Lanka. To bring leaders from Keells, HSBC, PickMe and Hatton National Bank into the same room says a great deal about the ambition here. We opened our Colombo office because we believe Sri Lanka is at a genuine turning point; the talent is exceptional, and we are proud to be building here for the long term.”

Business

Planters’ Association Chairman proposes 5-point plan for industry revival at 172nd AGM

Published

9 hours ago

2026/09/24

Sahan Weerasooriya

Seated from left to right: newly elected Deputy Chairman of the Planters’ Association of Ceylon (PAC), Binesh Pananwala; Secretary General, Lalith Obeyesekere; newly elected Chairman, Shanaka Samaradiwakara; Governor of the Central Bank of Sri Lanka, Dr. Nandalal Weerasinghe; and Chairman of the Sri Lanka Tea Board, Raj Obeyesekere.

Malwatte Valley Plantations PLC Director / CEO, Shanaka Samaradiwakara was appointed as Chairman of the Planters’ Association of Ceylon (PAC), while Kahawatte Plantations PLC Director / CEO Binesh Pananwala, was appointed as Deputy Chairman at the Association’s 172nd Annual General Meeting (AGM) on 19 September at the Cinnamon Grand.

The event was graced by Central Bank of Sri Lanka Governor, Dr. Nandalal Weerasinghe and Sri Lanka Tea Board Chairman, Raj Obeyesekere as Chief Guest and Guest of Honour respectively.

In his inaugural address, Samaradiwakara outlined a five-point vision for the plantation sector, focusing on value addition, research and development, land-use and productivity, irrigation and long-term security of tenure. He emphasised that the future of commercial agriculture in Sri Lanka would hinge on how effectively all industry stakeholders could work together, while maintaining clear understanding of the ground realities faced by producers.

Value-added tea accounted for more than 50% of total tea export volumes in 2025. Samaradiwakara noted Regional Plantation Companies (RPCs) have accounted for the majority of that volume through continuous investments, including most recently in matcha, green tea and artisanal teas.

In that context, he sought the support of the Sri Lanka Tea Board and the export sector to protect this emerging high value segment, given that significant quantities of green tea and other high-value teas remain unsold at auction while similar products continue to enter the country. “We respectfully request the authorities to review this matter and introduce appropriate measures to support domestic production and value addition,” he stated.

On research and development, he observed that commercially viable alternatives to several essential crop protection products remain limited. Accordingly, he called on the Tea, Rubber and Coconut Research Institutes to lead the development of practical, scientifically proven alternatives, while stressing that disease threatening the rubber industry requires immediate attention. “We cannot afford to repeat the experience of the coffee industry, where coffee blight devastated the sector,” he added.

Turning to issues around land-use policies and productivity, he noted that RPCs have diversified for over two decades in response to changing rainfall patterns, introducing crops such as oil palm, pepper and avocado. He warned that these investments are increasingly threatened by unsupportive policy, agricultural theft and crop damage by wild animals, costing companies millions of rupees each month in security. “It is imperative that these investments are protected through strong enforcement, appropriate regulatory reforms, and effective measures to address both agricultural theft and crop damage,” he noted. On irrigation, he appealed to the Government to relax archaic restrictions on groundwater use and simplify approvals for drilling tube wells in order to enhance climate resilience.

Addressing security of tenure, he highlighted that replanting often takes more than a decade to generate meaningful revenue, and that uncertainty over lease extensions is making it harder for RPCs to attract foreign direct investment and long-term financing. “If we are to attract fresh capital, accelerate replanting, modernise our plantations and improve productivity, security and certainty of tenure are mandatory,” he added.