Decline in inflation: Central Bank leadership deserves tribute

Sri Lanka’s headline inflation, as measured by the Colombo Consumer Price Index (CCPI), decreased to 4% last month. The Central Bank (CB) would have felt a sense of accomplishment over this noteworthy development because inflation is the worst enemy of the poor, and monetary authorities world over do their best to fight inflation as its core duty.

This achievement was possible due to the pragmatic leadership of CB Governor Dr. Nandalal Weerasinghe and the other members of the Monetary Board. Weerasinghe was appointed to the coveted position at the height of the economic crisis last year, when the country was grappling with hours-long power cuts and acute shortage of essentials, subsequent to the resignation of his predecessor, who is more or less regarded as the worst CB Governor in the history of Sri Lanka. Weerasinghe’s stature as a competent technocrat has been further vindicated by the prestigious Global Finance Magazine, which has recognised him as a CB governor with an A- rating.  

Maintaining and achieving price stability represents the fundamental obligation of a monetary authority, as it aids the economic well-being of citizens. Nevertheless, during the reigns of Weerasinghe’s immediate two predecessors, the CB abrogated its core responsibility of attaining price stability by indulging in expansionary monetary policy irresponsibly. Predecessors Professor W.D. Lakshman and Ajith Nivard Cabraal proclaimed that there is no relationship between money supply and inflation. In fact, Lakshman was propagating the so-called Modern Monetary Theory which backfired and eventually led to the rapid rise in inflation. Ironically, a Monetary Board member during the crisis period, in an interview given to the Lankadeepa newspaper remarked that he did not believe in the theory which states that when interest rates rise, the demand for money falls, in contravention of the accepted economic principles.

Sri Lanka’s inflation rate recorded a staggering 69.8% in September 2022, probably the highest in its history since the CB was established in 1950. Soon after the appointment of Weerasinghe as the CB Chief in April 2022, the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) were increased by 700 basis points to 13.50% and 14.50%, respectively. The rates were further hiked in July 2022 and last March. These tough measures were adopted in spite of the vehement objections raised by certain politicians and business owners. However, despite the criticism from numerous influential sections in the country, the Monetary Board stood tall and was committed to bringing down the inflation.

Inflation adversely impacts every segment of the society; however, it hits the poor and vulnerable sections the hardest. The hyperinflation experienced by the country over the last two years has led to a substantial deterioration of the standard of living. According to the bi-annual report released by the World Bank, Sri Lanka’s poverty rate had risen from 13.1% in 2021 to around 25% in 2022. The report also pointed out that households experiencing food insecurity are reducing their spending on health and education and rising food insecurity has also led to an increase in malnutrition and stunting.

Our country has paid dearly for not selecting the individuals with correct credentials to responsible positions throughout history. Appointing a career central banker with practical experience in monetary policy has served the best interest of the economy in no small measure. Weerasinghe was playing golf five days a week in Brisbane, Australia, and enjoying his post-retirement to the fullest when he was asked to come back and lead the CB last year. The fact that he returned to serve his motherland although he had the option to relish a comfortable lifestyle in a safe haven at a time when we are witnessing a mass exodus of educated professionals from Sri Lanka to greener pastures, warrants admiration.