Crisis-hit Sri Lanka sees inflation fall well below target, raising economic concerns

Sri Lanka has been slowly emerging from its worst economic meltdown in 2022, when it ran out of foreign exchange reserves to pay for essential imports such as food, fuel and medicines.

A Sri Lankan man walks through an alley that was flooded following heavy rains in the aftermath of Cyclone Ditwah in Colombo, Sri Lanka. (Photo | AP, FILE)

COLOMBO: Sri Lanka's inflation rose 2.1 percent last year, well below its target of five percent, the central bank said Thursday, but projected a "gradual acceleration" in 2026.

While low inflation may appear positive for consumers, a rate below the central bank's target signals underlying economic issues, including weak consumer demand.

Sri Lanka has been slowly emerging from its worst economic meltdown in 2022, when it ran out of foreign exchange reserves to pay for essential imports such as food, fuel and medicines.

But it was hit hard in November by a cyclone that killed at least 643 people -- with another 183 listed as missing -- and affected more than 10 percent of the island's population.

The storm caused an estimated $4.1 billion in direct physical damage to buildings and agriculture, according to the World Bank.

The Colombo Consumer Price Index (CCPI), the official measure of inflation, rose to 195.8 in December from 191.7 a year earlier, marking a 2.1 percent increase.

"Inflation projections... (since) November 2025 indicate a gradual acceleration of inflation towards the target of five percent in the period ahead," the central bank said.

Sri Lanka has secured a $206 million emergency loan from the International Monetary Fund (IMF) to meet part of the relief costs.

The country has been stabilising its fragile economy with the help of a $2.9 billion IMF bailout agreed in early 2023.