A Balancing Act Between Stability and Reality
(Lanka-e-News -26.March.2025, 11.35 PM) The Governor of the Central Bank of Sri Lanka (CBSL), Dr. P. Nandalal Weerasinghe, has declared that the country’s monetary policy is “appropriate” in its current form. In economic-speak, this is the equivalent of a doctor telling a patient in critical condition, “Your blood pressure looks fine.”
Of course, the CBSL’s decision to hold the overnight policy rate steady at 8% for the second consecutive time this year was hardly a surprise. Economists, armchair analysts, and even that one uncle who claims to have insider knowledge on everything had predicted it. But the question remains: does ‘appropriate’ mean ‘sufficient’?
Sri Lanka’s economy, battered by crises over the last few years, is showing signs of a rebound. A 5% expansion in 2024, compared to a contraction of 2.3% the previous year, suggests progress. However, before anyone pops the champagne, it’s worth considering whether this is genuine economic recovery or simply the natural result of bouncing back from rock bottom.
With an IMF bailout package worth $3 billion acting as a life raft, Sri Lanka has been able to stabilize its currency, manage inflation, and restore some level of financial credibility. But the economy still sits precariously on a tightrope. The government, tasked with balancing fiscal responsibility and public expectations, must avoid policy missteps that could send the nation tumbling back into crisis territory.
Governor Weerasinghe insists that inflation will return to “positive territory” in the latter half of the year. A bold statement, considering Sri Lanka’s recent tango with hyperinflation, which at one point saw prices rising faster than the hopes of an underfunded political campaign.
While lower inflation is undoubtedly a welcome reprieve for citizens still recovering from skyrocketing food and fuel costs, the fundamental question remains: has Sri Lanka truly tamed inflation, or is this just a pause before the next storm? Global commodity price fluctuations, volatile exchange rates, and unpredictable external shocks could easily reignite inflationary pressures, leaving the central bank scrambling once again.
Beyond domestic policy, Sri Lanka’s economic fortunes are also intertwined with global geopolitics. With U.S. tariffs under a potential second Trump presidency looming over global trade, China and India vying for influence, and Sri Lanka still in the middle of its debt restructuring process, the island nation’s economic stability is far from guaranteed.
In particular, Sri Lanka’s reliance on financial assistance from international lenders and bilateral creditors makes it vulnerable to external decisions beyond its control. The Paris Club creditors, India, and China all hold significant stakes in Sri Lanka’s economic fate, and any miscalculation in diplomatic dealings could result in financial consequences that even the most ‘appropriate’ monetary policy cannot fix.
Sri Lanka’s $3 billion Extended Fund Facility (EFF) arrangement with the IMF has been both a blessing and a bureaucratic headache. While the funding has provided much-needed liquidity, it comes with a laundry list of conditions—some of which are about as popular as a surprise tax audit.
To secure continued IMF support, Sri Lanka must remain on course with its fiscal consolidation targets, energy price hikes, and governance reforms. The challenge? These reforms, while necessary for long-term economic stability, could spark public backlash if they are seen as disproportionately burdening the working class.
So, when Weerasinghe speaks of ‘confidence’ from the administration regarding reforms, one must ask: confidence from whom? The IMF and international investors, or the average Sri Lankan citizen, who is still struggling with the cost of living?
Bloomberg Economics suggests that further easing of monetary policy could lead to economic overheating, triggering an import surge that would deplete Sri Lanka’s foreign exchange reserves and destabilize the rupee. In simpler terms, if the central bank gets too enthusiastic about pumping money into the economy, Sri Lanka might find itself back in the all-too-familiar cycle of currency depreciation and inflationary spirals.
Given that the country is still in the process of negotiating debt restructuring agreements, ensuring macroeconomic stability should take precedence over short-term political gains. Sri Lanka cannot afford policy experiments at this juncture, especially with its foreign exchange reserves still being closely monitored by global lenders.
To the casual observer, Sri Lanka’s economic narrative is beginning to resemble a classic underdog story—plagued by crisis, rising against the odds, and on the path to redemption. But reality is often less cinematic.
The ‘appropriate’ policy stance of the central bank, while pragmatic, does not mean that Sri Lanka is out of the woods just yet. The road ahead is filled with structural challenges, external uncertainties, and the ever-present risk of political volatility.
Sri Lanka has been here before—standing at the crossroads of recovery and relapse. The difference this time will be whether the government has the political will and economic discipline to stay the course, rather than seeking the next convenient shortcut.
For now, all eyes remain on the policymakers, the global markets, and, of course, the unpredictable forces of Sri Lankan politics. Because if there’s one thing history has taught us, it’s that ‘appropriate’ today does not always mean ‘adequate’ tomorrow.
-By LeN Financial Reporter
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by (2025-03-26 18:21:13)
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