Inflation angst to stir up as ICRA Lanka forecasts further acceleration in prices

Rating agency paints a gloomier investment outlook amid tightening credit conditions as rates soar

Sri Lanka’s red-hot inflation is forecasted to spiral further upwards in the next weeks and months, as the soaring global commodities prices collided with the massive weakness in the rupee at home, which is currently on a free fall, sending the prices of all goods and services higher at multifold levels.

According to the rating agency ICRA Lanka, the current double-digit inflation will prevail in the foreseeable future, making living in Sri Lanka a massive challenge, as working class is now forced to wait in queues for fuel and cooking gas on a daily basis while being punished further from the daily power cuts, which could get extended up to 15 hours.

“Key commodity prices have reached multi-year highs, fuelling inflation globally,” the rating agency said, indicating that a record level of inflation is a global phenomenon as a result of two years of pandemic-induced lockdowns and two years of stimulus money sloshed into the markets by the global central banks and governments.

But Sri Lanka’s situation turned nightmarish when the rupee lost 80 percent of its value year-to-date, with the Sri Lankan rupee becoming the world’s worst performing currency and thereby sending the prices through the roof.

“Sri Lanka is no exception; the double-digit inflation will accelerate further in the near term, continuing to inflict economic pain on the masses for a foreseeable future,” ICRA Lanka said, intensifying the inflation angst in the people.

The pandemic-induced supply chain crunch became more pronounced since Russia’s invasion of Ukraine and the resulting disruptions to trade caused by sanctions and embargoes, as they together account for 29 percent of global wheat exports, 19 percent of global corn supply and 80 percent of global sunflower oil exports.

They further account for a large share of global fertiliser and the fertiliser prices have quadrupled since the war broke out in February. India on Saturday banned exports of wheat, few weeks after Indonesia suspended exports of palm oil and other edible oils to stabilise the domestic prices, compounding the hunger concerns, specially in the developing world.

Bank of England Governor Andrew Bailey answering before the UK parliament on Monday described the global food inflation as “apocalyptic” and thus it could spell disaster for the poor and vulnerable and said anything that can be done to reinstate crop shipments from Ukraine would help.

The new Prime Minister Ranil Wickremesinghe too addressing the nation on Monday echoed somewhat similar sentiments, as he said Sri Lankans should brace for further economic hardships in the next three to four months before even a semblance of easing to be seen, as the country has no money even for next week’s imports.

Sri Lanka’s Colombo consumer inflation in April hit 30 percent, while the food prices rose by 47 percent.

In the United States, the consumer prices reached a 40-year high of 8.3 percent in April while in the UK, the consumer prices hit a three-decade high of 7 percent in March, with the forecast for April running near 10 percent.

Meanwhile, ICRA Lanka said the bleaker economic outlook for Sri Lanka would deter investments and thereby the credit growth, as the soaring interest rates have tightened credit conditions, as seen from the banking sector results and their future outlook.

“Interest rates are rising, self-reinforcing, as inflation expectations run stronger. Therefore, we can expect tighter credit conditions moving forward. Bleaker economic outlook also discourages any new investments, deterring credit growth,” the rating agency said.