Sri Lanka's inflation drops to single-digit levels for the first time in 2 years

Cash-strapped Sri Lanka on Monday said that its inflation dropped to 6.3 per cent in July from 12 per cent in June, a single-digit figure for the first time in two years, providing much-needed relief to the people amidst the worst financial crisis.

In a statement, the Census and Statistics Office of the Sri Lankan government said that the overall rate of inflation as measured by the Colombo Consumer Price Index on a year-on-year basis is 6.3 per cent in July 2023 and it was down from 12 per cent recorded in June this year.

“The overall rate of inflation as measured by the Colombo Consumer Price Index on a year-on-year basis is 6.3 per cent in July 2023. This was down from the 12 per cent recorded in June,” the statement said.

The decline in headline inflation is broadly in line with the disinflation path envisaged by the Central Bank of Sri Lanka (CBSL) in July 2023, the apex bank said.

The last time single-digit inflation was recorded was 5.8 per cent in September of 2021. The highest inflation since the island nation’s economy came under its worst crisis was 69.8 per cent recorded in September last year.

The statement further said that the decrease in the cost of food commodities had contributed to lower inflation. Over the past 12 months, food prices fell absolutely by 1.4 per cent, based on the index.

"Looking ahead, based on the available information, inflation is expected to moderate further and stabilise around the targeted level over the medium term. This disinflation process is supported by the lagged impact of tight monetary and fiscal policies, improvements on the supply side, the softening of energy and food inflation, and the favourable base effect," the CBSL said.

Sri Lanka in the unprecedented forex crisis curtailed imports leading to scarcities and high prices.

But since securing the IMF bailout of USD 2.9 billion in March this year the relaxation of import restrictions plus action to end power shortages had improved the situation drastically.

Governor of the Central Bank Nandalal Weerasinghe had said the country should record single-digit inflation by the third quarter of this year.

Sri Lanka, which announced its first-ever sovereign default in April 2022, has negotiated with the IMF for a bailout of USD 2.9 billion.

The island nation faced its worst economic crisis in history due to a shortage of foreign exchange reserves.

An imperative in the IMF bailout is to restructure external debt, which needs to be completed by September.

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