Sri Lanka’s annual inflation rate may have accelerated to near record high of 10.2 percent year-on-year in August as an extended drought pushed up food prices and as a weaker rupee aggravated import bills, Reuters reports. Annual inflation is expected to have accelerated to its highest since January 2009, when it hit a record 10.4 percent on a new consumer price index, a Reuters poll of 15 analysts showed. The sharp dip in the rupee currency along with higher foodprices drove annual inflation in the $59 billion economy to a 42-month high of 9.8 percent last month. The rupee has depreciated 16.8 percent since November, making imported inflation a serious threat. The country imports most essential food commodities as well as fuel. Consumer goods accounted for 20 percent of last year’s total $20 billion import bill.The current global conditions are unfavourable to Sri Lanka. Meanwhile, the slow economic growth of Western economies will decrease export earnings, rising oil prices and international food prices will increase import expenditure. Both these will affect the trade balance adversely. The slower growth in the US and in the EU countries will have an adverse impact on exports. The drought in the country compounds the economic problems that the country faces in the coming months as it has affected agricultural production and the generation of hydropower. Sri Lanka is particularly vulnerable owing to dependence on many basic items of food and the huge dependence on oil imports. Sri Lanka is directly exposed to global supply disruptions and export bans and price trends in wheat and sugar. The achievement of self-sufficiency in rice, particularly after the opening up of the North and East, has reduced the country’s vulnerability to the vagaries of global markets. However, it would be prudent to continue to monitor carefully the impact of the recent drought to ascertain the extent of the cereal deficit. These global and domestic developments will affect the balance of payments, economic growth, decrease revenue collection and increase the fiscal deficit. These adverse developments will pose serious economic challenges, including the containment of inflation.]]>

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