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COLOMBO: Sri Lanka’s inflation is expected to return to the government’s 5% target starting from the last two quarters of the year, a Central Bank of Sri Lanka (CBSL) official said on Wednesday, as the economy stabilises from a crippling financial crisis.

The economy has shown signs of recovery in recent months, aided by a $2.9 billion International Monetary Fund (IMF) programme, after it went into freefall in 2022 due to a severe foreign exchange shortage.

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“Inflation is projected to reach 5% in the medium term, which is from about the third quarter to the end of the year,” S. Jegajeevan, the director of CBSL’s economic research department, told reporters.

“The high base effect from the tax increases is expected to benefit inflation in early 2025 and possibly even bring it lower than 5%.”

The South Asian country defaulted on its overseas debt in May 2022 after depleted foreign exchange reserves triggered worst financial crisis since independence from Britain in 1948.

At the start of 2024, Sri Lanka raised its value added tax (VAT) to 18% from 15% to meet revenue targets under the IMF programme, sparking an uptick in its key inflation rate, which rose to 6.4% at the end of January from 4% the month before.

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The CBSL, which committed to maintaining inflation at 5% under a new act introduced last year, said price increases from the tax hike were unlikely to persist due to subdued demand and the economy operating below its full capacity.

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