Sri Lanka risks stagflation as prices continue to soar

• Stagflation is a period of slow growth coinciding with joblessness and rising inflation
• Fitch Ratings’ forecast for economy prior to rupee floating was at a weak 2.2% for 2022
• SL’s inflation hit a 13-year high in February; long queues for fuel, cooking gas and milk powder continue

Sri Lanka appears to be entering into an era of extremely high inflation and low growth, stoking serious concerns of stagflation, as the policymakers seem to have lost their grips on the economy, which is now going haywire with endless shortages of commodities and long lines of queues for daily essentials, which now have proved to be deadly for some unfortunate senior citizens. 

The prices have skyrocketed after the Central Bank floated the rupee on March 7, which according to some economic analysts, was done in a disorderly manner, without the support of a sizable foreign inflow. 

The effects of this move are reverberating through the economy by way of sharp increases recorded in sticker prices of almost every commodity. As a result, analysts doubt whether any inflows of foreign currency would ease the price pressures now confronted by the masses. 

Sri Lankan rupee has depreciated by nearly 40 percent since March 7. 
Sri Lanka is expecting a billion-dollar credit line from India to support its essential imports and it has also sought US $ 2.5 billion from China, it was 
revealed yesterday. 

“Stagflation is a period of slow growth coinciding with joblessness and rising inflation. And I think Sri Lanka is now in it,” said an economic analyst, who has been studying the earlier periods of stagflation in global economies. 
While Sri Lanka’s official jobless rate is not at worrying levels, the country’s labour force participation rate should send a chill among the policymakers, as it is one of the lowest at around 49 percent. It further slipped in 2021. 
In the United States and Australia, the rate is in mid-60 percent levels. 

Slower growth and rising prices could push people out of jobs as easing demand conditions, weak income generation and higher costs cause tighter financial conditions for firms and thereby resulting in potential industry-wide layoffs. 

Fitch Ratings recently forecasted Sri Lanka’s 2022 growth at a weaker 2.2 percent, slowing from an estimated 3.6 percent in 2021. This is before the country’s inflation hit a fresh 13-year high and also before the rupee was floated, giving rise to price increases across the board, which could slow down demand conditions significantly. 

For instance, the milk powder prices were raised for the third time in six months last week and now the 450-gram pack is retailed at an astronomical Rs.790 and a one-kilogram pack is just below Rs.2,000. Apart from the wide-ranging economic implications, Sri Lanka could see a slew of social and health issues such as increasing malnutrition among children, weakening the next generation, who is next in line to power the country’s growth.