Sri Lanka inflation surges on food costs, IMF tax pressure

BENGALURU: Sri Lanka's consumer price inflation rate jumped to 4.2 percent year-on-year in December driven by rising food prices, official data showed on Monday, although it remains well below record high levels seen at the height of the country's financial crisis.

Food prices rose 1.6 percent in December after falling 2.2 percent in November on the year, the Department of Census and Statistics said in a statement. Prices for non-food items, however, fell 6.3 percent in December from 7.1 percent year-on-year in November.

The National Consumer Price Index (NCPI), opens new tab captures broader retail price inflation and is released with a lag of 21 days every month. It rose from 2.8% in November. Sri Lanka racked up record high inflation that peaked at 70 percent in September 2022 after its economy was pummelled by the worst financial crisis in decades, triggered by a plunge in foreign exchange reserves.

Supported by a $2.9 billion bailout from the International Monetary Fund, inflation began to decline from last June but is likely to increase from January as Sri Lanka raises value-added tax to 18 percent from 15 percent to meet revenue targets set by the IMF.

Targets to improve public finances, which included raising power prices by 18% in October, have also hit inflation, analysts said. "We expect inflation to be just below 5 percent at the end of January ... despite increased taxes," said Dimantha Mathew Head of Research at First Capital Research, adding that still low demand would keep a lid on prices.

"Inflation spikes will be short-lived because of the high base effect from last year." The Central Bank of Sri Lanka (CBSL) is expected to leave its key policy rates unchanged on Tuesday to control inflation after cutting interest rates by 650 basis points since it started an easing cycle in June 2023 to help fuel an economic recovery from recession last year.

Sri Lankan shares fell for the tenth consecutive session on Monday, hurt by losses in industrial and financial stocks after the released of inflation numbers. The CSE All Share index settled 0.59 percent down at 10,371.69.

Expolanka Holdings PLC and John Keells Holdings PLC were the top losers on the index, falling 1.3 percent and 1.2 percent, respectively. Trading volume on the index rose to 54.60 million shares from 22.40 million in the previous session.

The equity market’s turnover rose to 979 million Sri Lankan rupees from 518.70 million rupees in the previous session, according to exchange data. Foreign investors were net sellers, offloading stocks worth 56.40 million rupees, while domestic investors were net buyers, purchasing shares worth 962.50 million rupees, the data showed.