Economists cast doubts over inflation figures in CB report

Economists have cast doubts on the manner in which Sri Lanka’s inflation index is calculated and on forecasts of foreign direct investments in the Central Bank (CB)’s annual report for 2011.
The Department of Census and Statistics has revised both the CCPI (Colombo Consumer Price Index) and the Core Inflation Index, used mainly for policy purposes, the report, released on Monday said.

“They are changing (the weightage). Year on year inflation rose to 8.4% in April and fell to 4.9% in December. I just can’t believe inflation fell (below 5%). What are these definitions that are being used (in the index),” asked Opposition MP and economist Eran Wickremaratne.

He also raised issues about the way economic growth and other indicators are calculated.
“They have made exclusions in the base year and also in the Core Inflation Index. These should not have been done,” he added.

Referring to the CCPI, the report said the weight of the largest sub-group ‘Food and non-alcoholic beverages’ dropped to 4% in the new index from 46.7% in the previous index. Further, the weights of health, recreation, culture, and education also reported decreases while all other categories reported increases in their weights.

It said simultaneously the Core inflation index, which is mainly used for policy purposes, was also revised. Instead of excluding entire food and energy items from the overall CCPI basket, the new core inflation index is compiled by excluding the items of fresh food, energy, transport, rice and coconuts from the basket.

Prof. Sirimal Abeyratne from the Economics Department of the Colombo University said it was difficult to believe that foreign investment had gone up last year (to US$1 billion) when the investment climate was not so conducive (for investment). “There were a few hotel projects but beyond that there was little investment,” he said.

Some of the main challenges this year, he noted, would be the pressure on internal finance (bank borrowings, etc) and external borrowings with foreign exchange markets unsteady. Local bank borrowings rose sharply to Rs. 191.8 billion last year from the projected Rs. 42 billion while approved estimates of borrowings this year are listed as Rs. 64 billion though it is seen at the 2011 level or even higher.

Mr. Wickremaratne also referred to the gap in domestic savings and believed it would be difficult to raise the $1 billion projected by the CB through a combination of two-tier capital by commercial banks, stock market investments and long term financing.

“I see a shortfall of $2 billion from foreign inflows,” he said, adding however that it was possible to reach targets set for foreign remittances and tourism. He said if the government maintained its targets of reducing credit, economic growth would slow down.

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