Inflation in Sri Lanka will peak at about 70% over the next two months before it starts to moderate in September this year, according to its central bank governor Nandalal Weerasinghe.
The National Consumer Price Index rose 45.3% year-on-year in May — a sharp spike compared to 33.8% in April, according to government data. Food inflation also surged, jumping 58% year-on-year in May compared to 45.1% in April, the data showed.
Maintaining that his calculations had factored an “adjustment” to higher energy prices, the governor of the Central Bank of Sri Lanka told CNBC’s “Street Signs Asia” Thursday that the country is eligible for an “extended fund facility” from the International Monetary Fund of $3 billion over three years.
The EFF was established to assist countries with serious payment imbalances.
Sri Lanka is in the throes of an economic crisis, its worst since independence in 1948.
After defaulting on its foreign debt, the country now faces a fuel shortage and social unrest, as angry protesters stormed the presidential palace last week. President Gotabaya Rajapaksa fled the country after being forced to resign, paving the way for Ranil Wickremesinghe to be elected as president.
Protestors who stormed Sri Lanka’s Presidential Palace in Colombo earlier this month, will have to deal with inflation hitting highs of 70% before trending down later in the year, according to the country’s central bank governor.
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Once the IMF begins dispensing money under what will be Sri Lanka’s 17th IMF program, other institutions such as the World Bank and the Asian Development Bank will supplement these funds by an additional $4 billion, according to the central bank governor.
He said the current economic crisis is an opportunity for Sri Lankan authorities to learn from past mistakes and not reverse reforms once the IMF program ends.
“Once the [program] is over, we have seen authorities move back and reverse good policies,” he said.
“This is, to me, an opportunity for the… authorities to learn a lesson and move in the right direction, even beyond the IMF program. That is the key for us to manage this economy on a sustainable basis,” the central banker said.
Conceding that while it is important to have a social safety net in place for the poor and disaffected, he said the root cause of the present economic crisis lies in decades of fiscal mismanagement.
“[The] government has been running large fiscal deficits for about 8% to 9% for long periods,” he said. “As a result we have… a very high level of public debt [which] has become unsustainable.”
A pro-reform president
Weerasinghe is optimistic that reforms will be carried out under Wickremesinghe, who was elected as the new president on Wednesday. Describing him as a “strong supporter” of economic reforms, he pointed out that the new president had been involved in the negotiations with the IMF.
“I am hoping that that commitment will continue… the sooner the better, so that we can reduce the time of the pain that we are experiencing now,” he said.
The central banker predicted that the problem of low foreign exchange reserves will continue for the “next several months” until an agreement is reached with the IMF. He also said Sri Lanka is negotiating lines of credit with several friendly countries such as India, Japan, China and Bangladesh, among others.
However, he dismissed reports that Sri Lanka had fallen into a “Chinese debt trap.”
China has funded large infrastructure development in Sri Lanka, extending loans over the past decade on terms often described as opaque by some observers. In an often cited example, Sri Lanka was forced to lease out its Hambantota port to a Chinese company for 99 years after failing to make repayments.
“I don’t agree with the concept…[of] getting trapped by China,” the banker said, adding that China has been “investing and helping” Sri Lanka over a long period of time. “That is why we have a certain amount of debt with China.”
He insisted those projects were “very good” and have “huge potential.”