While some experts argue that Sri Lanka should lower its inflation target to 2%, veteran economist Professor Sirimevan Colombage believes the Central Bank should continue with its current 5% inflation target to maintain economic stability.

Professor Colombage, a former Director of Economic Research at the Central Bank of Sri Lanka, said the country’s inflation dynamics differ from those of developed economies, as Sri Lanka is highly vulnerable to external shocks and supply-side pressures.

Speaking on the issue, he explained that factors such as global oil price increases, droughts, and floods can significantly affect inflation, and these factors are often beyond the immediate control of monetary policy.

“Inflation in countries like Sri Lanka is determined by various factors, unlike in developed countries. For example, recently, there was an oil price shock due to tensions in the Middle East. We are an import-dependent economy, and therefore we heavily depend on oil imports. As a result, this had a tremendous impact on inflation. These are supply-side factors. When there is a drought in agricultural production areas or floods, agricultural output declines and food prices increase. These factors are beyond the control of the Central Bank. The Central Bank can mainly control the demand side of the economy. That does not mean it cannot influence supply-side factors, but the immediate impact of monetary policy is on the demand side. Therefore, there should be some flexibility for the Central Bank to allow inflation to rise temporarily in order to accommodate supply-side pressures.”

Lower inflation target could slow economic growth

Professor Colombage warned that setting an excessively low inflation target could require tighter monetary policies, which may negatively affect economic growth.

He said achieving a lower inflation rate would require reducing the money supply and increasing policy interest rates, which could raise borrowing costs across the economy.

“When you target a very low inflation rate, you have to adopt a contractionary monetary policy. This means reducing the money supply and increasing policy rates. As a result, the entire interest rate structure of the economy will rise, which will adversely affect economic activity and slow GDP growth. My argument is that it would be ideal for the Central Bank to continue with the present inflation target instead of reducing it.”

Central Bank’s role is economic stability, not direct growth

Responding to criticism that the Central Bank’s policies are not sufficiently growth-oriented, Professor Colombage said promoting GDP growth is not the institution’s primary mandate, but maintaining price and economic stability helps create conditions for growth.

He pointed out that recent reductions in policy interest rates helped increase private-sector credit and contributed to economic expansion.

“GDP growth is not the mandate of the Central Bank, but the Central Bank can facilitate growth through price stability and economic stability. In the recent past, before the oil price crisis, the Central Bank reduced the policy rate to around 7%. This helped increase private-sector credit, and GDP growth reached around 5%. This is where the Central Bank can contribute to economic growth. There is criticism against the Central Bank, but its role is limited to stabilising the economy. The rest should come from the government and the private sector.”

Sri Lanka needs export, innovation policies for higher growth

Professor Colombage said Sri Lanka’s long-term growth prospects depend on implementing structural reforms, including a stronger export strategy and a national research and development policy.

He argued that Sri Lanka has not maintained a consistent export-led growth strategy and has struggled to balance protecting domestic producers with ensuring affordable prices for consumers.

“We did not have a proper export-led growth policy. We moved from import substitution to export-led growth and then shifted directions several times. Recently, there have been protests by farmers regarding import policies and food policies. Successive governments have had to support local producers by creating conditions to increase domestic production and protect livelihoods. However, there is a trade-off. When you protect local farmers and producers, consumers ultimately have to pay higher prices. Overall, we did not have a consistent export-led growth policy.”

He also highlighted Sri Lanka’s limited investment in research and development compared to regional peers.

“Countries such as South Korea, Malaysia, and Singapore have maintained consistent technology and innovation policies. This is where Sri Lanka remains behind. We do not have a proper research and development policy. Total expenditure on research and development in Sri Lanka, including both the public and private sectors, is around 0.1% of GDP. In countries such as Malaysia, Thailand, and Singapore, it is much higher, reaching around 4% of GDP. There are many structural factors that slow our economic growth apart from monetary policy. Monetary policy can only provide temporary support for growth.”

State-Owned Enterprises remain a burden

Another key issue highlighted by Professor Colombage was the need to restructure loss-making state-owned enterprises.

He said inefficient state enterprises place significant pressure on government finances and create broader economic challenges.

“Certain state-owned enterprises are a heavy burden on the government budget, and this has many adverse macroeconomic implications. These are the factors that slow economic growth rather than shortcomings in monetary policy.”

Professor Colombage concluded that while monetary policy plays an important role in maintaining stability, Sri Lanka’s long-term economic recovery depends on broader structural reforms, including export expansion, innovation, and improving the efficiency of state institutions.