Sri Lanka has highest inflation in South, Southeast Asia

The inflation rate in Sri Lanka has been reaching dizzying heights lately. It was 21.6 per cent on an average in 2007. In November it touched an all-time high of 26.2 per cent.

Sri Lanka also has the highest rate of inflation in South and Southeast Asia, points out Harsha de Silva, chief economist of LIRNE Asia, a regional development economics think tank.

"At the end of the last quarter, inflation in Indonesia was seven per cent; in Thailand 2.6 per cent; in Malaysia two per cent; in Singapore 2.9 percent; in the Philippines three per cent; in India six per cent; and in Bangladesh it was 11.2 per cent," he pointed out in a recent article on Sri Lanka's monetary policies.

"We are the champions, champions of bad policies driving people to misery," he said mockingly.

The government blames it all on the high cost of oil imports. But economists like de Silva say that if rising oil prices were the reason, then other countries in South and Southeast Asia importing oil should also register high inflation. In reality, however, barring Bangladesh, all of them have registered low rates of inflation.

Clearly, these countries have curbed inflation by appropriate policies and Sri Lanka has not, the economists argue.

De Silva says that huge amounts of unproductive expenditure by the government, and the printing of huge amounts of money by the Central Bank (the country's apex bank) to cover budget deficits have been the root causes of the high inflation.

"Between May and September 2007, the Central Bank printed Sri Lankan Rs 49 billion (the equivalent of $457 million) throwing financial discipline to the winds," he said.

The IMF's country report on Sri Lanka for 2007 had added that a "pause in monetary tightening during July-August had contributed to the acceleration in inflation".

A recent analysis by top-level economists of HSBC had stated that inflation in Sri Lanka was largely a fiscally caused monetary phenomenon because the large fiscal requirements of the government were met by the Central Bank printing money.

While the Central Bank has denied that it has been pumping too much money into the market, Deputy Minister of Finance Bandula Gunawardene admitted to the BBC in October last year that the government had resorted to printing money to cover budget deficits and that this had resulted in "excessive" inflation.

In December 2007, Gunawardene said that the government had "no option" but to continue printing money to meet the deficit.

Recently, the government revised the cost of living index, saying the existing one was outdated. By the new index, inflation for 2007 was 20.8 per cent and not 21.6 per cent, the government contended.

While economists agree that the old index was outdated in many ways, they point out that the new index is unrealistic and is meant to ignore some important items of expenditure.

Giving an example, de Silva said that the new index excluded expenditure on alcohol and tobacco, on which an average Sri Lankan household spent 2.2 per cent of its income. This was almost as much as it spent on education, which was 2.3 per cent, he pointed out.

The proportion of income spent on alcohol and tobacco would keep going up because their prices would keep going up. And yet, these expenditures would not figure in the government's calculation of inflation, the economist pointed out.

Source: NDTV