While war clouds loom large over the horizon in the Tamil-speaking North and East, an unprecedented 20.5 per cent inflation is threatening to push Sri Lankans in the other parts of the country below the poverty line.
Currently, Sri Lanka has the highest rate of inflation in South Asia. In 2006, money supply had expanded by 21 per cent due to the easy availability of credit and the printing of money. Well-heeled people were borrowing money to play in the stock market.
While the availability of money did increase investments, and GDP grew by 7 per cent, the majority of the population with fixed or marginally changing incomes, began to find it very difficult to keep pace with the soaring inflation. Those in the lowest rungs stood in danger of being pushed below the poverty line.
Worried by the unbridled growth in money supply, the country's Central Bank is to raise its key repurchase rate by a quarter of a percentage point to 10.25 per cent, a report said on Wednesday.
This is expected to slow down credit and make people save.
Earlier, the Governor of the Bank, Nivard Cabraal, had said that only SLRs 12 billion in new currency would be released in 2007, down from SLRs 40 bn or thereabouts in 2006.
But experts want much more to be done. "Inflation will continue to soar so long as overall governance is poor, budget deficits are high, and the Central Bank continues to be the handmaiden of the country's political leadership," Dr Harsha de Silva of the thinktank LIRNE Asia told Hindustan Times.
Government has to borrow money for developmental work and recurrent expenditure.
Defence spending is to go up sharply by 28 per cent to SLRs.139 bn ($1.3 bn) this year.
"But the money for all this has to be found not in an inflationary way as successive governments have done, but in a non-inflationary way," de Silva said.
"What Sri Lankan governments have been doing is to make the Central Bank print more money and buy Treasury (government) Bills even if there is no money in the bank," he said.
"As in India and several other countries, the Sri Lankan Central Bank should be independent of political interference.
It should be able to take decisions to control money supply and fix interest rates without having to bend to political pressure," de Silva added.