ECONOMYNEXT – Sri Lanka’s recent low inflation, and ‘deflation’ in some 12 month period has been beneficial to the country allowing growth to recover, Central Bank Governor Nandalal Weerasinghe has said.
“There would only be a problem regarding that if the country’s economic activity were to decrease in any way because of it,” Governor Weerasinghe told reporters.
“However, we saw that even though deflation existed for 11 months, the economy grew by 5 percent.
“Therefore, what is visible to us is that the deflation did not negatively affect our economy.
It is when [deflation] exists long-term in certain economies that it actually impacts economic growth activities.
“Because of that, I believe that when we look at it now, the fact that we maintained a low inflation rate has resulted in a beneficial situation for us.”
What classical economists called deflation was a contraction in credit and money, which was also a result of previous monetary expansion (rate cuts in modern terms), which led to falling prices and output among other outcomes.
Sri Lanka’s private credit however turned positive from June 2023, three months after the central bank lifted a surrender rule and allowed the rupee to appreciate (effectively re-valued the monetary unit from 360 to around 300) giving a burst of confidence and falling prices to economic agents.
Falling retail prices due to productivity growth or slower growth of money compared to output, which was seen before fiat money, was considered normal before the advent of the age of inflation.
Before 1980 Sri Lanka had the same inflation as developed nations due to having the same monetary anchor, including the positive inflation that started due to full employment policies in from the 1960s.
Most East Asian nations in the 1980s ran neutral or actively deflationary policy, with largely fixed exchange rates allowing domestic prices to be low making them export competitive, while monetary also allowed political and policy stability helping draw foreign investments.
Most Gulf countries also had neutral or slightly deflationary policies due to their links with Britain allowing them to have fixed exchange rates (currency boards or currency board like), with some which were re-named ‘central bank’ continuing to provide stability without a policy rate.
Yemen broke a currency board with IMF technical assistance and ended up with social unrest and monetary depreciation analysts say. (Colombo/Mar31/2025)