May 10, 2010 (LBO) – Sri Lanka’s main pension fund of private citizens earned a large real return as the Central Bank brought inflation down in 2009, though the national debt expanded as the state could not inflate away debt and impoverish pensioners. In the 2009 annual report the Central Bank said the government should go back to a price formula to adjust petroleum prices.
In Sri Lanka successive governments have resorted to inflation and currency depreciation to inflate its debt away.
High inflation makes the nominal economy expand at a faster rate than the budget deficit, bringing down the purchasing power of savings of the people and shrinking the relative sized of national debt.
From 2007, interest rates rose as the Central Bank tightened monetary policy to combat inflation.
In late 2008 interest rates rose further as the central bank engaged in contradictory monetary policy to defend a dollar peg eventually triggering a balance of payments crisis.
From 2004 to 2008 Sri Lanka’s national debt as a percentage of nominal gross domestic product was brought down from 102.3 percent to 81.1 percent amid high inflation and high nominal ‘growth’ in the economy despite widening budget deficits.
But in 2009 the debt to GDP ra