ECONOMYNEXT – Sri Lanka’s deputy finance minister has explained a 5 percent inflation target asked for by the central bank, saying it reflects the structural characteristics of a developing economy.
“To a developing and open economy like Sri Lanka a 5 percent inflation target is most suited as it faces a greater exposure to external shocks, supply side disruptions, and exchange rate volatility,” Anil Jayantha told parliament.
He was responding to a query raised by opposition MP Ravi Karunanayake on why the government chose a 5 percent target over a 2 percent target seen in most nations.
The central bank (CBSL) had set a 5 percent inflation target under its 2023 Monetary Policy Framework Agreement with the government, aiming for medium-term stability post-2022 crisis, but it faces criticism for being too.
Economists and opposition figures argue that the the target risks external instability as has happened in recent year.
Critics highlight that historical averages around 5 percent reflect reflects failure of the central bank to control inflation, reflected by high levels of depreciation and money printing.
“Empirical and historical evidence also supports the appropriateness of the 5 percent target. Accordingly, historical context between 2009 and 2021, showed that inflation averaged 5% in Sri Lanka, and from 1978 to 2008 was 12% per annum,” Jayantha said.
“Further quantitative analysis using Sri Lanka’s historical data revealed that maintaining the inflation target around 5 percent helps maximize economic growth.”
Central Bank officials have also said earlier that it believes inflation helps growth, despite the economic crisis and policy reversals that come in their wake.
It is not clear as to why a developing nation needs to create inflation in upwards of 5 percent (+/- 2 percent) and give needless pain to its population in order to achieve economic growth when it can achieve the same with a 2 percent inflation target.
The central bank had asked for a 5 percent floor target and 7 percent ceiling from the last administration and got it.
However, the target was missed last year with the central bank overperforming in its monetary stability.
There are increasing calls to reduce the target and also turn to a ceiling to prevent currency depreciation and a possible second default. (Colombo/Jan8/2026 – Update II/Recast)