Sri Lanka's Current Inflation Target

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Annexure 01



The central bank of srilanka currently has a target level of inflation of 5% and this implies that it would like the price increases to be around that level deputy minister Anil Jayantha Fernando told the current target was pegged on the previous performance and, it may change in the future when necessary the existing deal on this target will expire in 2026. But srilanka had lower inflation rates, it is below 5 percent, which the minister said, is not an issue as it benefits the households and businesses. Nevertheless, critics believe that this target has brought a lot of issues throughout the years. There have been numerous currency crises in the country since 2012. The rupee has fallen, food prices have increased, and real wages have declined. Such problems disappointed the citizens with political instability.

Printing of money as a way of funding government expenditures was also one of the causes of these crises, which led to inflation and depreciated the rupee. The Sri Lankan government employed a deflationary policy between 2022 and 2024, which made the rupee stronger. However, analysts have warned that if they cut the rates and reduce the deflationary policy, they could face another crisis.

Lessons From Other Countries.


Some historical events indicate that powerful monetary policies restore financial stability. New Zealand had relatively high inflation, but it managed to introduce a 0-2 per cent inflation target in the 90s, and this resulted in long-term stability. Taiwan and Singapore, which have been able to avoid high inflation by ensuring that the currencies were kept strong, to the extent that during global shocks it was possible to appreciate the currency. This cushioned the source of income and promoted effective business. In contrast to this, weak policies of countries such as Argentina led to recurrent crises, prices and social problems. So, we can come up with the idea that low inflation targets and stable currencies are key to sustainable economic growth and consumer confidence.

Conclusion.

Currently, Sri Lanka has a deflation rate of 0.6% which may have both positive and negative impacts. In the past, Sri Lanka faced an unusual increase in inflation, so that, now it is considered a positive impact from a consumer's perspective because the prices of goods are falling. So households can purchase goods cheaply. But in my point of view, if the deflation lasts long, it is not good for the future development of the country. When the prices of goods fall continuously, the investors' earnings also decline. .so, the investors are discouraged from investing, and the loan paybacks are more costly because the real value of the money is high, people will delay spending. That's why the Central Bank of Sri Lanka targets to maintain the inflation at 5%.

When policies are not strong, the country falls into crises once again,  so Sri Lanka needs to maintain a stable inflation rate, and it preserves the value of the rupee to ensure sustainable growth of the economy towards achieving durability.



References.

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