FINANCIAL CHRONICLE – According to Central Bank Governor Nandalal Weerasinghe, Sri Lanka’s recent experience with low inflation and a brief period of deflation has positively impacted the nation’s economic recovery.
Weerasinghe addressed the media, stating, “The only concern would arise if this situation led to a decline in the country’s economic activities. However, despite an 11-month span of deflation, we observed a 5 percent growth in the economy.” He added, “This indicates that deflation did not have an adverse effect on our economic performance.” The governor explained that long-standing deflation in specific economies tends to hinder growth, but in this case, the low inflation rate has been advantageous for Sri Lanka.
The term ‘deflation,’ as used by classical economists, refers to a reduction in credit and money supply, often following prior monetary expansion (such as rate cuts). This phenomenon can lead to decreasing prices among other effects. In contrast, a decline in retail prices that results from increased productivity or a slower money supply growth relative to output was historically considered normal before the introduction of fiat currency.
Prior to 1980, Sri Lanka shared similar inflation rates with developed nations, attributed to a common monetary anchor and the inflationary pressures stemming from full employment policies initiated in the 1960s. During the 1980s, many East Asian countries adopted neutral or actively deflationary monetary policies, benefiting from fixed exchange rates that kept domestic prices low, enhancing their export competitiveness. This approach, coupled with stable monetary policies, attracted foreign investments.
Similarly, several Gulf nations maintained neutral or slightly deflationary policies due to their historical ties with Britain, which offered them the benefit of fixed exchange rates (via currency boards or similar structures). Some of these countries, now referred to as ‘central banks,’ have continued to ensure stability without altering their policy rates. Analysts note that Yemen, after abandoning its currency board with assistance from the IMF, faced social unrest and currency depreciation.
(Colombo/Mar31/2025)
