CB expects January inflation to increase to 7% due to VAT revisions

The Central Bank (CB) expects the inflation to rise to 7 percent Year-on-Year (YoY) in January 2024 due to a one-off effect stemming from the implementation of increased Value-Added Tax (VAT), a reduction in the VAT threshold, and the removal of several VAT exemptions, all of which come into effect starting today.

“We have looked at the inflation. December inflation number came out at 4 percent. We think there will be a one-off impact of 3-4 percent by end of January. It will be a one- off increase and will gradually fade out. Our target is to bring it down to 5 percent,” CB Governor, Dr. Nandalal Weerasinghe said.

The government has implemented changes, effective today, including an increase in VAT rate to 18 percent, a reduction of the VAT threshold to Rs. 60 million, and the removal of VAT exemptions from 97 out of 138 goods.
The move prescribed by the IMF brings Sri Lanka in line with regional peers including India and Pakistan, in terms of standard VAT rate.

The inflation expectations for January fall within the inflation target agreed by the Central Bank with the Minister of Finance under the new Monetary Law. 
CB aims to keep the quarterly headline inflation rate within the target range of 5 percent, with a margin of plus or minus 2 percentage points. (NF)