Sri Lanka May consumer prices soar 45.3% y/y, highest since 2015

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A vendor arranges the rice bags inside a shop at the economic centre in Dambulla, Sri Lanka. Reuters

Sri Lanka’s headline inflation accelerated in May to the highest since 2015 due to rising food and transport costs, as the island nation grappled with its worst economic crisis in seven decades.

The consumer price index in May climbed to 45.3 per cent from a year earlier, up from 33.8 per cent the previous month, the statistic department said on Tuesday. It was the highest since at least 2015, according to Refinitiv data and First Capital Research.

A sharp drop in foreign exchange reserves has left the country of 22 million people struggling to pay for essential imports of food, fuel and medicine.

The ongoing crisis has triggered soaring inflation, partly caused by currency depreciation, domestic shortages and high global fuel prices.

Food prices in May leapt 58 per cent from a year earlier, up from 45.1 per cent in April. Transport costs jumped 76.7 per cent, up from 52.5 per cent previously, after the government raised prices for petrol and diesel last month.

Inflation will remain at elevated levels for the rest of the year, with Sri Lanka’s central bank likely to increase rates at its policy review in July, an analyst said.

“I think we will see elevated supply side pressure in June as well, especially with higher transportation costs. But it shouldn’t be a sharp increase like this,” said Lakshini Fernando, macroeconomist at investment firm Asia Securities.

A nine-member delegation from the International Monetary Fund (IMF) arrived in Sri Lanka this week for talks on a bailout package.

The country is hoping to borrow about $3 billion from the IMF and reach a staff-level agreement with the lender by the end of the team’s visit on June 30.

“Looking forward to reaching a staff level agreement and finalising the programme soon,” Prime Minister Ranil Wickremesinghe tweeted late on Monday, following talks with the IMF team.

Representatives from Lazard and Clifford Chance who have been appointed as Sri Lanka’s financial and legal advisers after the country suspended repayments on about $12 billion in foreign debt are also in the commercial capital Colombo.

Meanwhile an International Monetary Fund (IMF) team begun bailout talks in Sri Lanka on Monday, as the country’s cabinet cleared a constitutional amendment to dilute presidential powers that could assuage protesters amid rising tensions.

Economic mismanagement and the COVID-19 pandemic have left Sri Lanka battling its worst financial problems in seven decades, and a lack of foreign exchange has stalled imports of essentials including fuel, food and medicines.

The island nation of 22 million people is scrambling to get fuel shipments in the next three days, the energy minister told Reuters, as public disaffection grows because of a persistent shortage of diesel and petrol.

Sri Lanka’s cabinet on Monday approved an amendment to the constitution that could reduce presidential powers, in a move to appease protesters calling for President Gotabaya Rajapaksa to quit.

“The 21 amendment was tabled and passed in cabinet today,” Tourism Minister Harin Fernando said in a tweet, adding that the proposal will now be sent to the country’s parliament.

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