📈 Economist Warns of Rising Debt Strain and Stagflation Risks

Former CBSL Deputy Governor Dr. W.A. Wijewardena warns that Sri Lanka’s "honeymoon" period of low interest rates is ending, as external shocks and domestic refinancing needs create a volatile economic outlook. • Monetary & Inflation Risks CBSL may be forced to tighten monetary policy if inflation breaches the 7% upper bound. Potential for Stagflation: A high-risk scenario where rising input costs and price pressures coincide with slowing economic growth and rising unemployment. • Debt & Fiscal Vulnerability The government’s "revolving credit" model is under pressure; while interest payments are currently met by revenue, the rollover of maturing debt depends heavily on market liquidity. Tighter global conditions and the Middle East conflict threaten to increase borrowing costs, ending the low-yield environment for government securities. • External Sector & Currency Exchange Rate: A downward depreciation trend is anticipated due to weakening FX inflows and rising import bills. Energy & Imports: Higher global oil prices are expected to widen the trade deficit and strain external accounts. • Key Concerns Supply constraints affecting manufacturing and production inputs. Limited fiscal space to buffer against external shocks, leaving little room for policy error.