Sri Lanka inflation picks up to 5.0-pct in September

ECONOMYNEXT – Sri Lanka’s inflation in the 12-month to September 2019 accelerated to 5.0 percent in September 2019, up from 3.4 percent in August, data from the state statistics office said.

The Colombo Consumer Price Index grew 0.8 percent in the 30 days of September 2019 to 131.1 points, from 130.1 points a month earlier.

Sri Lanka’s rupee collapsed in 2018 from 153 to 182 to the US dollar with monetary instability generated by a ‘flexible exchange rate’, or a highly unstable peg, which was worsened by a political crisis in October 2018.

Critics have noted that both money (liquidity management, rates) and exchange (convertibility undertakings) are skewed against the rupee.

Excess liquidity is kept unsterilized for long periods, or new liquidity is injected until the rupee comes under pressure. Then the peg is left undefended (convertibility undertaking delayed) on the weak side until a steep fall called ‘disorderly adjustment’ takes place.

In sharp contrast there is no disorderly adjustment for appreciation. Dollar are bought, especially from the Treasury, with no disorderly appreciation.

In addition base money is also generated through swap contracts such as those used by speculators to hit East Asian pegs, analysts have noted.

Liquidity was kept tight in the latter part of 2018, helping prevent an Indonesia style meltdown. But there is a spike in bad loans and a credit contraction.

Soon after the currency fall, firms tend to absorb rising input costs, due to weak demand and payment arrears, but adjusts prices later. (Colombo/Oct01/2019)





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