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Sri Lanka’s Runaway Inflation and the Limits of Monetary Policy



by Dr Dushni Weerakoon

The bad news on inflation keeps coming. As of June 2022, year-on-year (YOY) inflation nationally is estimated at an all-time high of 59%. Annual inflation is lagging significantly behind at around 21%, indicative of the speed at which price inflation has been spiralling in recent months. This is in sharp contrast to Sri Lanka’s previous bout of high inflation in 2008 where the YOY increase was far more gradual (Figure 1). Then too, a similar combination of factors was at play. On the external front, a global financial crisis, a spike in international oil prices and sky-rocketing food prices prevailed. On the domestic front, a depressingly familiar combination of unsustainable fiscal, monetary and exchange rate policies were in place.

This time around too, the inflation bout was triggered by a series of macroeconomic policy blunders in managing the fallout of the COVID-19 pandemic; an untenable red hole in public finances, a massive injection of liquidity within a short time span, and an improbable exchange rate policy combined to bring about Sri Lanka’s harshest economic collapse. The inflation ‘pass through’ from the more than 80% currency depreciation that followed amplified the global price increases in food and fuel. The ban on chemical fertiliser use, import controls on food and high costs of transport added to the shortages, driving up prices further.

While Sri Lanka is still well below the commonly used threshold for hyperinflation (monthly inflation exceeding 50%) the rampant inflation this time around is consistent with a serious crisis of confidence across the economy. Monetary policy – i.e. raising interest rates – is the most appropriate tool at hand to fight inflation, but there are limits to its efficacy.

Today, inflationary pressures have intensified the world over with countries like the US and the UK seeing inflation rates hit 40-year highs. Unlike Sri Lanka, the inflation trigger in many of these economies was set off by buoyant demand and tight labour markets as countries emerged from the COVID-19 pandemic. The Russian invasion of Ukraine that followed went on to fuel energy and food price increases and add to supply bottlenecks – already battling a combination of challenges including a resurgence of COVID-19 in China. Almost everywhere, central banks embarked on a monetary policy tightening cycle, with New Zealand and South Korea starting early and aggressively. The intention is to anchor inflation expectations and cut off more persistent strength in nominal wage growth. Thus, the upswing in inflation and interest rate cycles point to a downswing in growth globally in 2022.

Having kept monetary policy too loose for too long, Sri Lanka started its tightening cycle in August 2021, albeit with timid steps – raising policy interest rates by a total of 200 basis points up to March 2022 even as inflation breached double-digit figures in November 2021. This was followed by an aggressive 700 basis point hike in April 2022. It signalled firm intentions to regain the Central Bank of Sri Lanka’s (CBSL) focus on price stability by engineering a reduction in demand through high interest rates and withdrawing liquidity from the economy. Effectively, in the current dire growth outlook for Sri Lanka, the policy intention means forcing a recession to tame inflation.

In choosing between the options of an aggressive hike that will lead to a recession or tolerating a prolonged inflationary spiral bordering on hyperinflation, the former is preferable. Once inflation takes hold, the damage can be corrosive, especially its deeply regressive impacts on lower income households. But a contractionary strategy to suppress demand will not achieve the desired outcomes if (a) inflation expectations are not well anchored and people expect rapid price increases to continue, and (b) supply side factors remain unaddressed.

A sector-wise breakdown of the National Consumer Price Index (NCPI) and the Colombo Consumer Price Index (CCPI) of YOY inflation in June 2022 shows that demand-driven domestic inflationary pressures appear to be responsible for much less of the rise in headline inflation. Food price increases are contributing the largest share of 36% towards the YOY national increase in inflation in the NCPI (carrying a weight of 44%) while it contributes a similarly large share of 26% in the CCPI (with a weight of 28%). Transport is the second largest contributor (8-11%) in both indices. Overall, the strength of inflation appears to mainly reflect the large increases in energy and food prices; in fact, when inflation is driven largely by excess liquidity and demand, price increases across goods and services tend to be more uniform.

With runaway inflation, tightening monetary policy hard and fast was almost inevitable to anchor inflation expectations. The policy will work though only if fiscal adjustments evolve in line with monetary policy. Sharp interest rate increases make government debt even more expensive to service, and when interest rates exceed economic growth, a country’s indebtedness keeps rising. Higher interest rates in the current context of a crisis of confidence overall in the economy, and especially on exchange rate risks, means that it will not be reflected in stronger capital inflows to stabilise the rupee either.

Upward pressure on inflation in Sri Lanka will not dissipate immediately. Continued direct financing of Treasury spending by the CBSL, high global energy and food prices, and continuing domestic supply-side factors – food and fuel shortages, import policies, and related market distortions – will add to price increases. Thus, the current upswing in real interest rates will likely go further if it appears that the policy mix is unable to reverse the inflation trend.

At this crucial juncture, prompt action on all macroeconomic policy fronts simultaneously is essential to help the CBSL put price stability at the core of Sri Lanka’s monetary policy framework and better anchor inflation expectations. If workers and businesses are unconvinced that runaway inflation is firmly in check, higher price expectations will feed back into the process, making the fight against inflation even harder. It will also delay the recovery from recessionary conditions – through cuts in investments and shortening of investment horizons that ultimately hurt employment and jobs – as the country looks to ease back from the current economic crisis.

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Lanka inflation hit 70.2% in August



Food prices climbed 84.6 percent, while prices of non-food items rose 57.1 percent in the crisis-hit island nation.

(Al Jazeera) Consumer inflation in Sri Lanka accelerated to 70.2 percent in August, the statistics department has said, as the island nation reels under its worst economic crisis in decades.The National Consumer Price Index (NCPI) rose 70.2 percent last month from a year earlier, after a 66.7 percent increase in July, the Department of Census and Statistics said in a statement on Wednesday.

Food prices climbed 84.6 percent, while prices of non-food items rose 57.1 percent in the tourism-dependent South Asian country of 22 million people.The Central Bank of Sri Lanka (CBSL) in August said the inflation rate would moderate after peaking at about 70 percent as the country’s economy slowed.

The NCPI captures broader retail price inflation and is released with a lag of 21 days every month.The more closely monitored Colombo Consumer Price Index (CCPI), released at the end of each month, rose 64.3 percent in August. It acts as a leading indicator for national prices and shows how inflation is evolving in Sri Lanka’s biggest city.

Sri Lanka’s economy shrank 8.4 percent in the quarter through June from a year ago in one of the steepest declines seen in a three-month period, amid fertiliser and fuel shortages.

“Inflation is expected to taper from September,” said Dimantha Mathew, head of research for Colombo-based investment firm First Capital. “However, inflation is only likely to moderate and reach single digits in the second half of 2023.”

An acute dollar shortage, caused by economic mismanagement and the effects of the COVID-19 pandemic, has left Sri Lanka struggling to pay for essential imports including food, fuel, fertiliser and medicine.

The country earlier this month reached a preliminary deal with the International Monetary Fund for a loan of about $2.9bn, contingent on it receiving financing assurances from official creditors and negotiations with private creditors.

India on Tuesday said it had begun talks with Sri Lanka on restructuring its debt and promised to support the crisis-hit neighbour mainly through long-term investments after providing nearly $4bn of financial aid.

The High Commission of India in Colombo said it held the first round of debt talks with Sri Lankan officials on September 16.

“The discussions held in a cordial atmosphere symbolise India’s support to early conclusion and approval of a suitable IMF programme for Sri Lanka,” the High Commission said.

Sri Lanka will make a presentation to its international creditors on Friday, laying out the full extent of its economic troubles and plans for a debt restructuring.

The Indian High Commission also said New Delhi would continue to support Colombo “in all possible ways, in particular by promoting long-term investments from India in key economic sectors”.

India’s support to Sri Lanka this year has included a $400m currency swap, a $1bn credit line for essential goods and a $500m line for fuel. In addition, India has also deferred payment on Sri Lankan imports of about $1.2bn and given a credit line of $55m for fertiliser imports.

The High Commission said India had continuing development projects worth about $3.5bn in Sri Lanka, whose president earlier this month asked his officials to resolve obstacles to projects backed by India. He did not specify the obstacles or the projects.

President Ranil Wickremesinghe has said Sri Lanka will turn a free trade agreement with India into a comprehensive economic and technological partnership.

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Raigam Wayamba Salterns Group turnover tops 1 bn



Raigam Wayamba Salterns PLC saw its group turnover increase from Rs. 959.6 million to Rs. 1,147 million recording a growth rate of 19.5% year on year.Despite the fact that the financial year 2021/2022 was filled with many challenges, as a result of prudent management practices implemented and followed, the Raigam Wayamba Group was capable of reporting its ever-highest growth in 2021/2022,” said Chairman, Raigam Group, Dr. Ravi Liyanage.

Raigam Wayamba Salterns PLC, which was listed in the Colombo Stock Exchange (CSE) in 2010 is the front line player in the value added salt market in Sri Lanka and it supplies a range of consumer salt products under the popular brands “Isi”, “Ruchi”, “Welcome” and “Triple Washed” as well as various salt products used as an input for different industries in bulk form.All the consumer products of Raigam Wayamba Salters are SLS certified for its quality and consistency and the processes are ISO certified.’8

The Raigam Wayamba Salterns Group is equipped with salterns, salt refineries and processing plants located in Puttalam and Hambantota districts. In addition to that the raw material supply for these operations has been ensured by the 1,800 Acre saltern established in Kuchchaweli in Trincomalee District by the parent company of the Raigam Group. Further the Puttalam Salt Limited (one of the successor to the National Salt Corporation) is also an associate company of the Raigam Group.

The well-known Raigam brand and state of the art island wide distribution network are distinct strengths of the Raigam Group. The Raigam distribution network operates on a latest IT platform and also includes distribution channels for modern trade, industry and bakery sectors.

Sri Lanka’s economy which was under-performed for two years due to COVID pandemic situation was experiencing the impacts of the foreign exchange crisis in the latter part of the financial year 2021/2022. Despite the fact that the financial year 2021/2022 was filled with many challenges, as a result of prudent management practices implemented and followed, the Raigam Waymba Group was capable of reporting its ever-highest growth in 2021/2022.

The group turnover increased from Rs. 959.6 million to Rs. 1,147 million recording a growth rate of 19.5% Y to Y. At the same time the Profit after Tax grew from Rs. 149.7 million to Rs. 215.6 million at an annual growth rate of 44%. As a result of these successful financial performances the Earning Per share for the year stood at Rs. 0.76 compared to Rs. 0.53 in the corresponding year. This has made a significant impact on the value of the shareholders’ investment increasing the Net Asset Value Per Share form Rs. 5.06 to Rs. 5.74.

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Singer’s legendry sewing industry and Academies developing skills and entrepreneurship in Sri Lanka



A name synonymous with Singer (Sri Lanka), Singer sewing machine has over the years become an indispensable product at local households, helping thousands of women and men to make a living through a sewing business. For over six decades, Singer has been manufacturing its trademark sewing machines in Sri Lanka. Singer brand has claimed many firsts in sewing machine innovations including the world’s first zig-zag machine and the first electronic sewing machine.

Singer Industries, a subsidiary of Singer (Sri Lanka) manufactures traditional, portable and digital sewing machines at a fully-fledged facility, where it provides direct employment for over 100 factory workers and accommodates around 150 service agents. The traditional sewing machines are of two variants such as the straight stich and the zig-zag sewing machine, while the portable and digital sewing machines cater to the modern customers. Singer Industries is mandated with assembly of sewing machines and manufacturing of cabinets and stands for sewing machines.

The sewing machine stands and cabinets are 100% locally manufactured with the help of local suppliers who also depend from sewing machine manufacturing. Singer Industries also consists of a strong R&D section for sewing machine innovations. All the sewing machines produced by Singer Industries are distributed by its parent company, Singer (Sri Lanka) through their 431 distribution touch points. Currently, Singer sustains its dominance as the market leader for domestic sewing machine industry with a market share of 85%. Among the facilities, Singer Industries provides to its customers, it has deployed special service technicians at island wide service centres for technical assistance and support related to sewing machines. Its YouTube channel has access to over 130 technical assistance videos to further support its valued customers.

The name ‘’Singer’’ is closely associated with sewing. One of its major contributions to the local sewing industry is the Singer Fashion Academy. For more than 60 years, the Academy has helped thousands of individuals to develop sewing skills and become entrepreneurs. The Fashion Academy conducts sewing courses and diplomas while a degree pathway is to be implemented soon to further support students. The Academy is also the first and only institute in the country to receive course validation status from the Chartered Society of Designers (CSD) in the UK.

As of today, the academy consists of 54 branches Island wide and offers 22 sewing courses, 2 diplomas and another 10 courses as part of its Diwi Saviya program for low-income families. Annually, over 5000 – 6000 students get enrolled in Singer Fashion Academy’s courses. In addition to the physical classes, the academy conducts online courses and also provides a recorded version of lessons to further facilitate students. During the last decade, over 60,000 students have successfully completed the Fashion Academy’s courses and some of these students have already started their own sewing businesses. The Fashion Academy has helped in developing the passion of sewing among Sri Lankans and as a result, sewing has become a hobby among many.

Sewing can be considered one of the most feasible self-employment opportunities with its potential to generate a good income. A business of one’s own is a luxury at present due to current economic crisis. Many individuals who started their sewing businesses from scratch have developed their businesses to highly profitable ones. Singer Fashion Academy has all the resources ready to help develop sewing skills and is committed to develop a skilled workforce for the betterment of the country.

(Company news release)

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