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Sri Lanka expects to reach staff level agreement with IMF in late August (CBSL)

ECONOMYNEXT – Sri Lanka’s economy is expected to contract by more than 8% in 2022 and inflation could peak below 70%, central bank governor Nandalal Weerasinghe has said.

“According to an earlier projection, we thought the economic contraction would be 7.5%. And it looks like it will be a bit more like that and it will probably top 8% this year,” Governor Weerasinghe told reporters after keeping the policy rate at 15.50% but market rates around 25-30%. .

Weerasinghe said in a discussion on Thursday August 15 that the stronger the economic contraction, the faster the recovery will be.

“If there is stronger negative growth this year, that means we should be able to recover next year, mainly in the second half,” he said.

Adding that uncertain factors such as changes in global prices for goods and services may affect the situation, Weerasinghe said if Sri Lanka managed to maintain normal economic conditions at current levels, sectors such as tourism would recover faster. .

“Because of the decisions we made in the recent past, we are now seeing a favorable outcome. Especially the last time, we saw a possibility of inflation up over 70%. But now, we see that there will not go that high and with the increase in the electricity tariff, we are hopeful that it will come down in the future,” Weerasinghe said.

“On the other hand, our forex crisis has improved since the last time. We were able to allocate currency for essential items like petrol, diesel and medicine thanks to the decisions we made. The cost imports decreased and exports increased to a satisfactory level.

He said that Sri Lanka is at a level of taking care of the country’s basic needs without resorting to short-term loans.

Sri Lanka had to raise its rates to stop private credit, reduce capital outflows and restore the credibility of an anchor broken by two years of money printing.

Due to high interest rates, credit growth is expected to slow. There is a purpose to having high interest rates. It’s about slowing private sector credit and reducing private sector credit growth, reducing monetary expansion, and then reducing inflation, Weersinghe said.

There is a sharp correction in the external sector with a slowdown in private credit and also in inflation.

Inflation in Sri Lanka rose by 60.8% in the 12-month period to July 2022, following the failure of the currency float after two years of money printing, the data shows. official.

Governor Weerasinghe said inflation could peak around September below 70% before showing a downward trend.

“Inflation will rise until September and we will see a downward trend thereafter. This is a guess and no one can say exactly how much it will be. It will certainly increase gradually to around 70%. But we cannot give an exact figure,” he said.

“Previously it was expected to reach around 70%, but I don’t think it will reach that level now. It will peak around 65 and it will tend to drop,” he said. (Colombo/ August 18, 2022)

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