The Hon. Ravi Karunanayake

¶ 01 Hon. Speaker, I seek your permission to raise this Question under Standing Order No. 27(2).

¶ 02 Following the 2022 economic crisis, the leadership at the time made a considerable commitment to halt the deterioration of Sri Lanka’s economy and stabilize it. While those efforts deserve recognition, setting an inflation target of 5 per cent has trapped our economy in a cycle where real incomes, savings, and competitiveness gradually decline. If liquidity deterioration is, say, 5 per cent per annum, over four years the rupee’s value can fall by around 25 per cent. This severely impacts the economic security of our people.

¶ 03 Sir, that is, an inflation target of 5 per cent — even if nominal GDP increases — does not reflect productivity-based real growth. It raises borrowing costs, reduces investment opportunities, and nudges professionals who are contemplating emigration to actually leave.

¶ 04 Meanwhile, every 1 per cent increase in interest rates adds approximately Rs. 160 billion to Government expenditure, and every one-rupee depreciation imposes about a Rs. 45 billion impact on the Budget.

¶ 05 Many small open economies target inflation around 2 per cent and keep it under control — not as a fad, but to protect domestic price levels, reduce borrowing costs, and anchor investor confidence. A 2 per cent target protects public savings, strengthens the rupee, and signals that Sri Lanka is a country bound to stability and credibility.

¶ 06 Before I conclude this Question, I must flag a concern to the Hon. Minister. I am unsure, given what the Governor of the Central Bank stated yesterday, whether there is a drift beyond government direction and how far this so-called independence has gone. I wish to bring that to your attention through the Hon. Speaker.

¶ 07 The Government’s so-called “charm” policy appears to beautify numbers while degrading real value. If people’s wages and savings cannot keep pace with costs, and if professional outmigration accelerates, no numerical target will save us. What Sri Lanka needs now is to maintain an inflation target in the 2–3 per cent range, together with supply-side economic reforms — that is, economic reinvigoration.

¶ 08 I look forward to asking the Hon. Minister why Sri Lanka is maintaining such a high inflation target and to noting that a 2 per cent target would restore hope and confidence among the public.

¶ 09 Hon. Speaker, these are my questions to the Hon. Minister:

¶ 10 1. When many successful economies maintain a 2 per cent inflation target, why have the Government and the Central Bank chosen a 5 per cent target?

¶ 11 2. Does every 1 percentage point increase in interest rates add approximately Rs. 160 billion in additional cost to Government expenditure?

¶ 12 3. Does the Hon. Minister confirm that every one-rupee depreciation has an impact of around Rs. 45 billion on the Government coffers? If so, is a 5 per cent inflation target consistent with financial stability?

¶ 13 There is a nominal growth of 5 per cent, but the real growth is only 2 per cent. Therefore, there is a depreciation in the overall position. If you allow the inflationary target of 5 per cent to take effect, it will be counterproductive to the development of the country. I am sure the Hon. Deputy Minister can lecture me on that.

¶ 14 4. Does the Government accept that maintaining a 5 per cent inflation target is an aesthetic step that promotes only nominal, statistical growth rather than real growth?

¶ 15 5. Has the Ministry of Finance conducted any study to measure the impact on people’s savings of maintaining inflation at an elevated 5 per cent?

¶ 16 6. Does the Government accept that being perceived by foreign investors as a country that temporarily tolerates high inflation undermines long-term investment confidence?

¶ 17 Sir, if you are targeting export earnings of Rs. 36 billion and FDIs of Rs. 15 billion by 2030, you cannot anticipate 5 per cent inflation and still expect investors to come. I am sure the Hon. Prime Minister would have experienced this in India. When she was there, she invited them saying, “Come and invest in our country.” But, without tax holidays and without protecting the rupee, you would never have those investments coming in. I am sure the Hon. Deputy Minister will respond adequately when answering the Question.

¶ 18 7. Will the Hon. Minister consider revising the Monetary Policy Framework Agreement between the Central Bank and the Government to establish a 2–3 per cent inflation range?

¶ 19 8. Small and medium enterprises are being crushed today. Interest rates that were around 10 per cent went up to about 30 per cent. Those who loudly claimed they were protecting these businesses are silent now. Please do not push them into non-performing loans, Hon. Minister. By maintaining a 5 per cent inflation target, this problem will worsen. Does the Government accept that this raises input costs, reduces export competitiveness, and erodes long-term investor confidence?

¶ 20 9. What is the IMF’s response to the 5 per cent target? Is it embedded in the debt sustainability agreement? How have other multilateral agencies indicated their view?

¶ 21 10. Hon. Minister, is it not time to reconsider and set a 2 per cent inflation target that protects public savings, reduces the State’s interest burden, and helps bring back foreign investment and skills? Please brief us on these points.

¶ 22 I am sure the Hon. Deputy Minister will give a very comprehensive Answer to the complex issues I have raised relating to monetary policy.