Sri Lanka has the highest annual inflation in the region (Asia) with April figures touching 25 percent and Vietnam at 21.4 percent being the closest to such high inflation, an international bank has said.
HSBC’s Global Research in a May 15 report titled ‘Sri Lanka Inflation: How high will it go?’ and released on May 15, a copy of which was obtained by The Sunday Times FT, says ‘even by its own history, inflation in Sri Lanka is on the high side.’

Quoting the New Colombo Consumers’ Price Index, the analysis notes that the country has a history of high inflation, averaging around 11% year-on-year since 1990, and suggests that policy management has not been consistently successful in controlling price pressures in the economy.

The report said that since Sri Lanka is a net importer of food and imports its entire petroleum requirement, a large part of the increase in inflation can be explained by surging international food, commodity and oil prices. However, it is strong demand at home that has allowed retailers to pass those cost increases onto the consumer. Additionally, inflation ex-food and energy has been seen higher for well over two years, consistent with an economy operating above potential.

“In this report we have built a model to explain and forecast the trajectory of Sri Lankan inflation over the next 18 months,” the Bank’s research unit said, adding “Our model suggests that inflation is going to remain elevated for some time, with the peak around the end of the year and a decisive fall materialising only in the second half of 2009, assuming that international commodity prices level off and the Central Bank of Sri Lanka (CBSL) achieves its aggressive reserve money growth targets for 2008.”

It said, “We find that reserve money growth matters when it comes to inflation. And with the CBSL restricting reserve money growth in a meaningful manner since September last year, this should eventually help cool domestic demand and temper the rate of inflation. The impact on inflation might, however, be limited in the near term on account of rapidly rising international commodity prices.

From a longer term perspective, we believe steps should be taken to boost the potential growth rate of the economy so that Sri Lanka can “maintain” a 7% rate of real economic expansion without fanning inflationary pressures. Here, we think higher investment, increased labour productivity and improvements in investment climate are key.”