Sri Lanka Records Drop in Inflation as Economy Looks to Recover

The Central Bank said that the year-on-year headline and core inflation continued to decelerate in December 2022 for the third consecutive month.

"The downward adjustment in inflation rates is expected to continue through 2023, supported by subdued aggregate demand resulting from tight monetary and fiscal policies, expected improvements in domestic supply conditions, and the passthrough of easing global commodity prices to domestic prices, along with the favorable statistical base effect," the Central Bank said in its latest monetary policy review.

As per the GDP estimates published by Sri Lanka's census and statistics department, the real economy is estimated to have contracted by 7.1 percent in the nine months ending September 2022, on a year-on-year basis.

With tighter monetary and fiscal policies in place, along with disruptions to domestic supply conditions, real activity in the final quarter of 2022 is also expected to have remained subdued.

The Central Bank said that the economy is set to make a gradual recovery during the year of 2023 supported by the expected improvements in domestic supply conditions, underpinned by the timely implementation of corrective policy measures.

Meanwhile, an anticipated improvements in foreign exchange flows and the resultant enhancement in business and investor sentiment are expected to reinforce the expected recovery in the period ahead.

Sri Lanka is trying to recover from a serious economic crisis, which hit the country in 2022 resulting in the authorities being unable to pay for fuels, medicine and other supplies imported from overseas.

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