Lanka’s inflation surge not unique - HSBC economist

Emerging markets grappling with same problems:

By Surekha Galagoda

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Inflation at present is one of the biggest headaches for policy makers and the inflation surge in Sri Lanka is not unique as every emerging market is grappling with the same set of problems - ie the increasing oil prices and the food crisis said HSBC Economist Asia Pacific Frederic Neumann.

He told a breakfast meeting organised by HSBC on Friday that small open economies such as Sri Lanka are more exposed to these global challenges than others.

He said that the Central Bank of Sri Lanka has slowed reserve money growth and this is a differentiator. Therefore, I think that the Central Bank is ahead and they have been proactive.

Neumann said that inflation is a major economic problem globally and it will persist for some time before cooling off. He said that the supply of oil or food is not a problem as supplies are increasing, but production of bio fuel, high consumption, high demand from emerging markets and climate change are the reasons for this, he said.

He said that demand driven inflation is more persistent than supply driven inflation. Therefore, it will take some time before the situation becomes right.

Earlier there was a myth that if the US economy slows down emerging markets will fall. Now there is tremendous growth in emerging markets which is generated by the emerging markets itself. For example, China is the final destination for machinery and oil as well as other consumer goods.

Neumann said that it is a turbulent time globally due to the sub prime crisis. The US economy is growing slower while the world economy is growing fast.

This is a demand led commodity market. Therefore, tightening of monetary policy is needed to contain inflationary pressures. For the time being slowing economic growth and low interest rate require central banks to tighten monetary policy and therefore Central banks globally have a great responsibility of steering economies in the correct path, said Neumann.

Neumann holds a PhD in International Economics and Asian Studies and prior to joining HSBC he was a Professor at Johns Hopkins University, the Wharton Business School of the University of Pennsylvania and the Graduate School of Pacific Studies and International Relations at UC San Diego.