Sri Lanka's High Interest Rate Trap: Growth Risk Amid Disinflation 📉

• Economy is in its worst crisis since 1948, with real per capita GDP not expected to return to 2018 levels until 2026. • Social impact is severe: The Poverty rate reached 24.5% in 2024 (up from 11.3% in 2019), alongside high youth unemployment and malnutrition. • Monetary Paradox: The Central Bank benchmark interest rate remains high at 7.75% despite sustained disinflationary pressures. • Headline inflation has fallen below the 5% target for three consecutive quarters (as of August 2025) and moved from negative territory (Q1/Q2 2025) to slightly above zero (Q3 2025). • High rates are deemed fiscal self-harm and a threat to debt sustainability (debt-to-GDP near 100%), as they suppress economic activity while increasing debt-service costs. • External Sector: Accounts are stable, with a current-account surplus projected for 2025, and gross official reserves exceeding US$ 6 Bn (H1 2025). This stability suggests no financing crisis justifies the high rates. • The economy grew by 4.9% in Q2 2025, indicating that recovery is possible. High interest rates are criticized for delaying this recovery and straining public finances. • Analysts argue the 7.75% rate is indefensible given below-target inflation, stable external accounts, and the need for growth to escape the debt trap.