FINANCIAL CHRONICLE – The recent enthusiasm expressed by macroeconomists regarding the return of monetary depreciation and the subsequent rise in living costs, which they assert aligns with the central bank’s inflation objectives, is in poor taste.
Inflation is fundamentally an unethical concept conceived by macroeconomists post-1960s, who dismissed classical economic principles in favor of statistical approaches that have caused significant hardship for many.
The resurgence of depreciation and inflation, which threatens to diminish consumption and living standards, disrupts capital investment by inflating projected costs and hampers government initiatives aimed at reducing electricity expenses. This situation is hardly a cause for celebration.
While short-term profits may benefit certain companies, banks, and early adopters closest to the central bank’s inflationary measures, the long-term consequences of inflation and depreciation will stifle growth, ultimately leading to an increase in costs.
The central bank recently reported that inflation remained low at 1.6 percent year-on-year in February 2026, which they claim allows for the adjustment to rising energy prices without exceeding their 5 percent target. This announcement came after a significant depreciation of the rupee, which fell from 300 to 315 due to monetary expansion tactics like swaps and a year-long suspension of currency convertibility.
In a rather self-satisfied tone, the central bank projected that inflation would reach the 5 percent target by the second quarter of 2026, earlier than previously expected, and would stabilize around this target afterwards. However, this assertion raises questions about the actual financial space available to households.
How can the central bank assert there is ‘space’ for higher prices when it has severely undermined wages, pensions, and employees’ provident fund contributions by allowing the rupee to plummet from 184 to 300 between 2022 and 2023, and from 131 to 184 against the US dollar since 2015?
What family has the financial capacity to absorb the escalating cost of living? It is disheartening that a state institution can characterize the suffering it inflicts upon the poor—through increased food and energy prices and a reduction in disposable income—in such jubilant terms.
Are they oblivious to the fact that the rupee’s depreciation has led many individuals to the brink of poverty and forced them to skip meals?
The International Monetary Fund (IMF) has similarly trivialized the struggles faced by the less fortunate. They noted a 5 percent year-on-year economic growth in 2025, and a ‘rebound’ of inflation to 2.2 percent in March, framing these developments in a positive light.
However, the resurgence of inflation, which has eroded the purchasing power of the impoverished and driven up food and energy costs, is hardly a matter for celebration. The claimed 5 percent growth in Sri Lanka resulted not from inflation, as macroeconomists would suggest, but from a period of stability that allowed for predictable pricing and gradual wage increases.
This recovery aligns more closely with Say’s law than with the inflation-stimulus narrative promoted by certain economists and IMF representatives. Support for the recovery has also stemmed from the current central bank leadership’s efforts to stabilize the currency, avoiding further inflation in essential sectors such as housing, education, and transportation.
Nonetheless, the devastating impact of the rupee’s prior depreciation is still evident in service sectors like private education and housing, where costs continue to rise while wages lag behind.
Governments have faced removal in the past as a result of rate cuts that led to currency depreciation, illustrating the political ramifications of such economic policies. Contrary to claims of ‘wage spiral inflation’ made by some economists, the reality is that labor strikes result from the rapid increases in food and energy prices, which are the first to react to monetary expansion, rather than being a primary cause of inflation.
Price increases are merely one consequence of inflationary policies. Classical economists define inflation as the excessive issuance of reserve money, exceeding what is necessary for a stable monetary system. The repercussions of central bank-induced inflation are complex, manifesting in rising commodity prices as well as forex shortages and depreciation shortly after liquidity is injected into the economy.
Key negative outcomes also include asset bubbles and misguided investments, which often culminate in economic crises, even in environments with floating exchange rates where currency crises seem improbable.
The central bank’s inflationary swaps with commercial banks have created a chain reaction, illustrating the fallout from inflating reserve money. Finance companies, once excluded from the central bank’s inflationary mechanisms, are now engaged in currency swaps with commercial banks, which leads back to the central bank and generates loans, ultimately affecting the forex market.
Interestingly, while central bank staff have received substantial salary increases, which provide them with the means to cope with rising living costs, the majority of the population has not experienced similar benefits. A brief review of job postings reveals stagnant salary levels since the currency collapse in 2022.
Individuals who earned between $300 and $500 in 2015 have not seen their salaries recover in dollar terms, despite the central bank’s salary increases and defined benefit pensions that insulate its employees from the consequences of inflationary practices.
The practice of allowing monetary depreciation, once considered a criminal act in earlier economic frameworks, has been legitimized under the IMF’s Second Amendment, resulting in significant disruption in developing regions.
Despite the challenges, some economies, like those in East Asia, which adopted deflationary policies in the 1980s, have emerged as robust investment centers. In contrast, Sri Lanka, having embraced the IMF’s approach to competitive exchange rates, has struggled with discredited economic reforms and social unrest.
The current environment, with a rupee trading at 315 in the spot market and 320 for imports, underscores the systemic issues within the central bank’s operational framework, as Sri Lanka appears to be repeating its post-civil war economic trajectory.
The recent capital outflow from rupee bonds is indicative of these ongoing challenges.
It is not merely that John Baptiste Say’s theories have been validated in Sri Lanka while Keynesian principles have faltered; the harmful doctrine of reflation that has devastated economies in the US and Europe since around 2000, and intensified in Sri Lanka from 2012 onwards, has been repeatedly discredited by classical economists for centuries.
The repercussions of Sri Lanka’s last rate cut have been obscured by inflationary swaps, which have burdened state agencies with debt and exposed them to forex risks. Interest rates cannot be lowered by increasing reserve money, a principle that has consistently been refuted by classical economic thought.
As the value of the monetary unit deteriorates, interest rates will inevitably rise, leading to budgetary crises as experienced in Sri Lanka since the IMF’s Second Amendment in the 1980s. The capacity for investment or debt repayment diminishes as well.
State-owned enterprises are facing forex losses, similar to issues currently confronting India’s Indigo and Air India due to the Reserve Bank of India’s currency depreciation. In contrast, airlines like Qatar Air and Emirates continue to thrive, despite the ongoing turmoil.
It is untenable to manage a country or business under a central banking system that disregards economic theory and the foundational principles laid out by classical economists. No individual who has engaged with Adam Smith’s “Wealth of Nations” would advocate for lowering rates through the expansion of reserve money.
Consequently, Sri Lanka experiences rising interest rates following rate cuts that prompt currency crises. The economic discipline known as political economy was not well-defined during Adam Smith’s era, and the prevailing philosophy was mercantilism. Smith’s studies were rooted in moral philosophy.
The belief in inflation by an institution tasked with maintaining a stable monetary system is fundamentally unethical. To deny responsibility for liquidity injections, including through swaps, while claiming that currency value is ‘market determined’ is also a moral failing.
Imposing exchange and trade controls on citizens after creating money shortages through inflationary practices constitutes a further moral breach. Threatening to penalize individuals attempting to avoid using the devalued currency of an inflationary central bank is particularly unjust.
It is hypocritical to provide social support under IMF programs while simultaneously devaluing the currency through excessive dollar purchases and denying convertibility on printed money, disproportionately affecting marginalized populations as inflation targets are pursued.
The flawed belief in inflation-driven growth has led to disillusionment among the electorate, who often fail to recognize that the inflationary policies of the central bank are the root of their struggles. The depreciation of the currency has exacerbated external shocks even when inflation remains low.
Sri Lanka’s parliament has made a grave mistake by granting ‘independence’ to a central bank that endorses a 5 percent inflation target alongside monetary depreciation. This error must be rectified with a genuine monetary constitution that curtails the inflationary practices of the central bank or dismantles its monopoly if the nation is to progress and uphold democratic values.
