Single-digit inflation? Sooner than you think!

By Antony Motha
Over the past year, prices – as measured by the Colombo Consumers’ Price Index (CCPI) - have increased by 19.5%. Against this backdrop, the words of Leon Henderson, the American economist, sound ominous. He said, “Inflation is like pregnancy. If you don’t do something about it quickly, it costs you twice as much.”

So, the Central Bank of Sri Lanka (CBSL) has been doing something about it quickly… On the sidelines of a public lecture on Thursday, H N Thenuwara, CBSL’s Assistant Governor, explained: “The very tight monetary policy that we are now adopting will have an impact on future inflation,” he avers.

With the CBSL having met reserve money targets during Q1 of 2007, prices have actually come down during this period. This fact has not been reflected in headline inflation numbers, which are typically reported on an annual point-to-point basis. The removal of the oil subsidy last year resulted in a one-off increase in the administered price of petroleum products. Largely due to this bold decision and consequent trickle-down effects, inflation for the three months March to June 2006 stood at a whopping 12.4%.

“Removal of the subsidy helped bring down the budget deficit and was a favourable monetary policy measure in the medium- to long-term”, explained Dr P Nandalal Weerasinghe, Director of Economic Research at CBSL. The oil subsidy cost the exchequer Rs 23 billion during 2005 and Rs 9 billion during 2006. Weerasinghe also expects that the CBSL’s monitoring mechanisms will help reduce inflation to a desirable, single-digit level by end 2007.

With the statistical blip caused by the subsidy removal being factored out, analysts are predicting a gradual decline in reported inflation measures. Indications are that, barring unforeseen circumstances, inflation will move towards 10% by June 2007 itself.