Home Short payment terms Sri Lanka faces hyperinflation as inflation rises | Print edition

Sri Lanka faces hyperinflation as inflation rises | Print edition

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By Bandula Sirimanna

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Sri Lanka now faces a hyperinflationary situation, with the country’s inflation hitting a new high of 54.6% in June, several leading economists have said, referring to the Central Bank’s latest announcement of official data. on economic indicators.

The Sri Lankan rupee has depreciated by more than 50% against the dollar this year, forcing the Monetary Authority to stabilize its inflation-ravaged rupee and it opts to withdraw some low-value banknotes from circulation .

The Business Times, in its article on the economic catastrophe published on March 27, predicted that soaring inflation would lead to hyperinflation in the country, putting pressure on people already struggling with shortages and suffering in chaos. economic. This critical situation has now emerged as the prices of goods and services are rising out of control almost on a daily basis, Colombo University economics professor Sirimal Abeyratne told the Business Times.

He added that in general, the term hyperinflation is used when the inflation rate increases by more than 50% per month. Typically, hyperinflation is triggered by very rapid growth in the money supply.

This could be due to the government printing money to pay for its expenses or something called demand-pull inflation. The latter occurs when increased demand exceeds supply, driving up prices due to a shortage of goods and services, he explained.

The Central Bank was managing the situation when it resorted to inflation targeting and money supply control during the period 2018-2019 on the instructions of the International Monetary Fund.

But inflation targeting went haywire following the Monetary Authority’s tilt towards Modern Monetary Theory in 2020, where the Central Bank printed historic volumes of money putting severe pressure on the rupee, triggering the worst import and exchange controls since the 1970s. He pointed out that when more money is put into circulation, the real value of the country’s currency can fall.

Therefore, when measured in terms of its impact on people’s lives, hyperinflation can be devastating, with the prices of essential goods rising daily.

The Monetary Authority should focus on core issues in a comprehensive plan to tackle the causes of the hyperinflationary situation to combat runaway inflation, which has significantly weakened the local currency, he suggested.

The country will have to correct inconsistent and misguided economic policies while controlling money printing only to match the value of overall monetary transactions in the economy, he stressed.

A shortage of essential products in the market and ever-increasing prices must be tackled while tackling supply chain disruptions; he said, adding that the depreciation of the rupee and domestic policy issues will have to be settled in a short period of time.

In this framework, the value of the Sri Lankan rupee acceptance may soon be diminished and this has been clearly indicated with the decline in the value of the rupees. 5000 note because people can’t even buy a cup of tea with Rs. 20 or even Rs 50, said Aminda Methesila Perera, senior professor in the faculty of business studies at North Western University.

Rs. 10, 20, 50 notes will soon be out of circulation, forcing the Central Bank to print new high-denomination notes following the ever-increasing amount of rupees to be paid for the dollar, he claimed.

It was the first time the increase in the Colombo Consumer Price Index (CCPI) crossed the psychologically important 50% mark, according to the Census and Statistics Department.

As a result, the prices of essential items are skyrocketing every day with the price of petrol rising to Rs.470 per liter from Rs.420 and short distance bus fares rising to Rs 40 from of Rs 12.

People’s purchasing power has gone down considerably as they now buy five kg of samba rice at the price they bought a year ago for 10 kg of the same variety of rice.

“In such a situation, a large sum of money is needed to purchase goods and services and meet other payment obligations,” he said.

Sri Lanka will be forced to stop printing money and introduce a new currency or peg to a long-term basket of currencies, he said, adding that this was in the works.

Sri Lankan authorities and the Reserve Bank of India are considering setting up a dedicated payment mechanism with Sri Lanka to allow Indian exporters to collect payments in Sri Lankan rupees as the country grapples with the worst crisis. economy, said a senior finance ministry official. Under the scheme, Sri Lankan importers will be allowed to pay for the goods to Indian banks in Sri Lanka, and the banks, in turn, will make payment in Indian rupees to the exporters, he disclosed.

This will allow Sri Lanka to import goods from India as the country’s foreign exchange reserve dwindles making it impossible to import essentials including food and fuel.

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