ECONOMYNEXT – Sri Lanka’s real gross domestic product estimated for nine months at 9,866 billion in constant rupees has almost reaching the 9,751 billion calculated for 2021, based on the latest data released by the state statistics office.
After a 30-year civil war Sri Lanka went though serial currency crises and inflationary policy blew the balance of payments apart, prompting foreign borrowings and serial stabilization measures which slowed growth and depreciation which destroyed domestic capital.
In 2018, amid inflationary policy and heavy foreign borrowings, GDP reached 9,925 billion rupees with steep depreciation in the second half.
In 2019, amid stabilization measures, and more foreign borrowings, 9-month GDP eased to 9,905 billion rupees.
In 2020 with the Coronavirus crisis, 9-month GDP fell to 9,311 billion rupees, data show.
In 2021, amid a recovery and excess liquidity from extraordinary money printing, and run-down of foreign reserves, 9-month GDP reached 9,751 billion rupees.
In 2022 the rupee collapsed after inflationary policy. The economy contracted in the next two years to 9,203 billion rupees, and 8,794 billion rupees as stabilization measures were implemented and foreign borrowings were no longer an option after a default.
Sri Lanka’s GDP has recovered under very gentle deflationary policy over the past two years, after radical deflationary policy from the third quarter of 2022 to save the rupee and stave off spontaneous dollarization.
Classical economists have pointed out that resorting to inflation for growth is a type of cheating which works with higher initial profits for companies and producers as long as people do not expect inflation and suffer losses in real wages or other factors of production.
To increase actual output stability, capital and economic freedom is required.
There have been calls for the government to remove controls in the economy, in trade, land and labour.
There are also growing calls for the central bank not to resort to inflation as a device for growth as it has led to enormous human suffering and output volatility after the end of a 30-year.
Over 2025, the rupee has depreciated amid record current account surpluses and people paying high taxes to improve government finances, which macro-economists have blamed for external trouble for over 70 years.
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“Inflation at first merely produces conditions in which more people make profits and in which profits are generally larger than usual,” classical economist Friedrich Hayek wrote in Constitution of Liberty when so-called ‘full-employment policies’ were promoted in US and British universities.
“Almost everything succeeds, there are hardly any failures. The fact that profits again and again prove to be greater than had been expected and that an unusual number of ventures turn out to be successful produces a general atmosphere of favourable risk taking.
“This situation will last however only last, however, only until people begin to expect prices to continue to rise at the same rate.
“After that factor prices would be bid up and profits would fall.
“Inflation thus can never be more than a temporary fillip, and even this beneficial effect can only last as long as somebody continues to be cheated and expectations of some unnecessarily disappointed,” Hayek said.
“Its stimulus is due to errors it produces. It is particularly dangerous because its harmful after effects of even small doses of inflation can be staved off only by larger doses of inflation.
“Once it has continued for some time, even the prevention of further acceleration of inflation will create a situation in which it will be very difficult to avoid a spontaneous deflation.”
A decade after of Hayek publishing the Constitution of Liberty, the Bretton Woods collapsed and the world was in Great Inflation. At the moment, after reflation began in the US around 2001, and beliefs in stimulus, and there is instability around the world.
(Colombo/Dec17/2025)
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