An unprecedented financial crash in 2022 brought months of consumer goods shortages, with inflation peaking at nearly 70% that year. File
| Photo Credit: Reuters

Sri Lanka’s consumer prices fell by 2.1% in November, the highest deflation rate recorded by the economically fragile island nation since 1961, official data showed Saturday (November 30, 2024).

An unprecedented financial crash in 2022 brought months of consumer goods shortages, with inflation peaking at nearly 70% that year.

Since then, a $2.9 billion bailout loan from the International Monetary Fund (IMF), tax hikes, and other austerity measures have slowly made headway in repairing the island’s economy.

“Headline inflation will remain negative in the next few months, deeper than previously projected, mainly due to larger downward adjustments in energy prices and reductions in volatile food prices,” Sri Lanka’s central bank said in a statement.

The bank said inflation was likely to return to its target level of five percent in the coming months.

Sri Lanka had already seen deflation of 0.8% in October and 0.5% in September.

President Anura Kumara Dissanayake, who was elected in September, has vowed to maintain the IMF bailout programme negotiated by his predecessor that includes higher taxes and cuts to state spending.

Peter Breuer, Senior Mission Chief for Sri Lanka at the IMF speaks during the International Monetary Fund (IMF) press conference in Colombo, Sri Lanka, November 23, 2024.
| Photo Credit: REUTERS

The International Monetary Fund (IMF) approved the third review of Sri Lanka’s $2.9 billion bailout on Saturday (November 23, 2024) but warned that the economy remains vulnerable.

In a statement, the global lender said it would release about $333 million, bringing total funding to around $1.3 billion, to the crisis-hit South Asian nation. It said signs of an economic recovery were emerging.

In a note of caution, it said “the critical next steps are to complete the commercial debt restructuring, finalize bilateral agreements with official creditors along the lines of the accord with the Official Creditor Committee and implement the terms of the other agreements. This will help restore Sri Lanka’s debt sustainability.”

Cash-strapped Sri Lanka plunged into its worst financial crisis in more than seven decades in 2022 with a severe dollar shortage sending inflation soaring to 70%, its currency to record lows and its economy contracting by 7.3% during the worst of the fallout and by 2.3% last year.

“Maintaining macroeconomic stability and restoring debt sustainability are key to securing Sri Lanka’s prosperity and require persevering with responsible fiscal policy,” the IMF said.

The IMF bailout secured in March last year helped stabilise economic conditions. The rupee has risen 11.3% in recent months and inflation disappeared, with prices falling 0.8% last month.

The island nation’s economy is expected to grow 4.4% this year, the first increase in three years, according to the World Bank.

However, Sri Lanka still needs to complete a $12.5 billion debt restructuring with bondholders, which President Anura Kumara Dissanayake aims to finalise in December.

Sri Lanka will enter into individual agreements with bilateral creditors including Japan, China and India needed to complete a $10 billion debt restructuring, Dissanayake said.

He won the presidency in September, and his leftist coalition won a record 159 seats in the 225-member parliament in a general election last week.