Sri Lanka has made significant progress in reducing its inflation rate, bringing it down from a staggering 69.8% in September 2022 to 6.3% in July 2023[2][4]. This achievement can be attributed to several factors:
- Tight monetary and fiscal policies: Sri Lanka implemented tight monetary and fiscal policies, including increasing the policy rate and undertaking fiscal austerity measures to control inflation[1][3].
- Improvements on the supply side: Sri Lanka made efforts to address supply-side issues, such as improving power shortages and implementing import restrictions[1].
- Softening of energy and food inflation: Sri Lanka experienced a softening of energy and food inflation, which contributed to the reduction in overall inflation[1].
- Favorable base effect: The favorable base effect refers to the comparison of current inflation rates with a higher inflation rate in the previous period. In Sri Lanka’s case, the lower inflation rate in July 2023 compared to June 2023 contributed to the reduction in inflation[1].
Additionally, Sri Lanka received a bailout of nearly $3 billion from the International Monetary Fund (IMF) in March 2023, which helped bolster its foreign exchange reserves and further contributed to lowering inflation[1].
However, despite Sri Lanka’s success in reducing inflation, Bangladesh is still struggling with its own inflation situation. Rising food prices, with a food inflation rate of 9.76% in July 2023, are a particular concern[1]. Experts have pointed out several reasons for Bangladesh’s ongoing struggle with inflation:
- Interest rate controls: Unlike Sri Lanka, Bangladesh has interest rate controls, which limit the impact of increasing the interest rate or policy rate on the market[1].
- Lack of policy adjustments: Experts argue that Bangladesh has not taken the necessary policy measures to effectively address inflation. They suggest that the focus has been more on supply-side factors, such as the Russia-Ukraine War, rather than considering the demand side and domestic demand[1].
- Monetary financing and refinancing facilities: Bangladesh’s monetary financing of the government budget, which is equivalent to printing money, and increased refinancing facilities have contributed to the inflationary situation[1].
- Fiscal and financial challenges: Bangladesh faces challenges on both the fiscal and financial sides, including increased indirect taxes and the struggle to supervise existing banks[1].
In summary, Sri Lanka’s success in reducing inflation can be attributed to a combination of tight monetary and fiscal policies, supply-side improvements, and external support from the IMF. Bangladesh, on the other hand, faces challenges related to interest rate controls, lack of policy adjustments, monetary financing, and fiscal and financial issues. These factors contribute to the ongoing struggle with inflation in Bangladesh despite Sri Lanka’s progress.
