The Hon. (Dr.) Anil Jayantha - Minister of Labour and Deputy Minister of Finance and Planning

¶ 01 Statement: Decision to Maintain a 5 Per Cent Inflation Target

¶ 02 Hon. Speaker, in response to the Standing Order 27(2) question raised on 24 October 2025 by the Hon. Ravi Karunanayake:

¶ 03 1. The 5 per cent inflation target reflects Sri Lanka’s structure as a small open developing economy exposed to external shocks, supply disruptions and exchange rate volatility. Pursuing too low a target initially would be excessively costly in terms of output and employment.

¶ 04 - Historically, inflation averaged about 5 per cent from 2009–2021; from 1978–2008 it averaged 12 per cent per annum. Quantitative analysis using Sri Lankan data indicates that maintaining around 5 per cent helps maximize growth; statistical models inform these averages.

¶ 05 - Targeting as low as 2 per cent at the initial stage would require persistently tight monetary conditions, suppressing investment, slowing recovery and raising unemployment—undesirable for an emerging market. The 5 per cent target is a balanced approach under the Flexible Inflation Targeting (FIT) framework, allowing flexibility for temporary shocks while anchoring expectations at a credible level. Hence most emerging/developing economies set targets above 2 per cent.

¶ 06 - Monetary policy decisions consider overall macroeconomic conditions to maintain price stability, not merely the Government’s interest cost.

¶ 07 - Under the Central Bank of Sri Lanka Act, No. 16 of 2023, the primary objective is domestic price stability. Under FIT, decisions consider inflation outlook, growth outlook, external and monetary sector developments, fiscal conditions and financial markets. Fiscal implications are among many factors.

¶ 08 - Under FIT, the Central Bank formulates and implements monetary policy while managing a flexible exchange rate aimed at domestic price stability. The exchange rate is largely market-determined within this framework.