Sri Lanka awash in dollar liquidity, country wide inflation at 22.1-pct

Nov 06, 2007 (LBO) – Sri Lanka's country-wide inflation shot up to 22.1 percent in September, the latest data shows, while the monetary authority is grappling with a liquidity shock from foreign borrowings that has flushed the system to unprecedented levels. Sri Lanka's most widely watched index, the Colombo Consumer Price Index (CCPI) hit 19.6 percent in October, but the island-wide Sri Lanka Consumer Price Index (SLCPI) overtook the Colombo index two months ago.

The SLCPI has a 1997 base, compared to a five decade old base for the index in the capital. However due to the difficulty in collecting country wide data it is not published as quickly as the Colombo index, which comes out on the last day of every month.

Sri Lanka's central bank pushed inflation up in 2007 despite promising to keep it only at 10 percent because it was forced to print money to finance the government, prompting calls for fundamental reforms to its governing law or abolishing it in favour of a currency board.

In August country-wide inflation shot up to 21.7 percent.

In the 12-months to August central bank financing of the deficit was 47 billion rupees, higher than the 2006 calendar-year central bank financing of 38.5 billion rupees.

The government also had a