Lanka's inflation will slide below 18% after 2010 - ADB Country Director

By Lalin FERNANDOPULLE

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Inflation in Sri Lanka will be around 18 per cent next year then will slide down in the following years, said Country Director Asian Development Bank (ADB), Richard Vokes.

He was addressing the media on the Asian Development Outlook 2008 Update (ADO Update) which was released on Tuesday. "Developing Asian countries must implement structural reforms that support the agricultural sector or else face another dramatic rise in food prices", he said.

While oil prices are likely to soften the short-term, it will remain high and volatile in the long-term. High oil prices are here to stay. As food prices are heavily influenced by oil prices, high food prices are here to stay.

Vokes said Sri Lanka's inflation growth will depend on global oil prices in the next few months.Oil prices are a major concern compared to food prices for the Sri Lankan economy. ADO Update warns that inflationary pressures in the region are increasing and could boil over if left unaddressed.

The report projects an inflation rate of 7.8 per cent in Asia and the Pacific this year, an increase from an earlier estimate of 5.1 per cent. Inflation could reach 6 per cent next year.

The report also warns that the inflation spike seen throughout developing Asia cannot be blamed entirely on cost-push factors such as high global commodity prices. "Sri Lanka is one of the countries that the ADB has not done an Update. It is only on larger economies that the Update focuses on", the Country Director said.

The global economy is heading towards a recession due to exchange rates, supreme crisis, high oil and food prices. Asian economies will face turbulent times but will steer ahead of other economies.

Moderate growth and rising inflation have characterised Asia during the first eight months of this year. If Asia is to keep away from the global storm prudent macroecomonic management is essential to address the fundamental causes of tight commodity balances.

Demand pull factors such as excess aggregate demand and inflation expectations, account for a larger share of variations in the domestic price inflation.

The ADO Update urges Asian economies to address rising inflation even at the expense of slower growth, adding that he region must learn to adjust to high commodity prices.

"The region should address the roots of inflation with tight monetary policies. Short term pain for long term gain should be the ultimate goal", ADB Chief Economist Dr. Ifzal Ali said.

The ADB said that developing Asian countries will revert to a moderate growth outlook of 7.5 per cent this year and 7.2 per cent next year after posting its fastest growth of 9 per cent - in 2007 in nearly two decades.

The ADO Update states that the authorities are reluctant to introduce reforms due to political pressure and as a result macroeconomic imbalances deepen. Prolonged political instability could halt investment and affect growth prospects in the medium term.

The ADB said that work on the breakwater of the Colombo South Harbour Expansion Project is progressing and that rebidding for the terminals will commence next month.

The Bank will continue to support the road, transportation, power, water supply and sanitation development work in the country.