The stark contrast between Sri Lanka’s remarkable inflation control success and Bangladesh’s persistent inflationary struggles offers an interesting case study in economic policy implementation. While Sri Lanka transformed from experiencing a 64% inflation rate in 2022 to achieving price stability within two years, Bangladesh continues to be in the cycle of stubbornly high inflation rates that have remained well above target levels. So what went wrong with our policies that we are not able to attain the desired inflation rate, while Sri Lanka displayed a groundbreaking success despite its enormous inflation figure?
Sri Lanka successfully brought its inflation down to 0.5% by August 2024. But the country’s monetary authorities didn’t stop there. By November 2024, the country even achieved negative inflation at -1.7%, demonstrating an extraordinary turnaround from economic crisis to price stability. This dramatic transformation occurred despite the country facing its worst economic crisis in decades, encompassing foreign exchange shortages, fuel queues, and political upheaval.
Bangladesh’s inflation story presents a markedly different picture. Bangladesh has struggled with persistently high inflation, with rates at 9.05% in May 2025, following 9.88% in October 2023. More concerning is the structural nature of this problem. Bangladesh’s inflation has averaged 7.2% over the last 5 years, with cumulative inflation of 41.5%. This persistent elevation above target levels indicates fundamental policy and structural issues that remain unaddressed.
Sri Lanka’s Winning Formula
Sri Lanka’s success stemmed from a comprehensive, multi-dimensional approach that combined robust and dynamic monetary policy, fiscal discipline, and structural reforms. The country’s central bank demonstrated remarkable policy agility, implementing what can be characterised as “shock therapy”.
The monetary policy response was both swift and substantial. Sri Lanka’s central bank implemented substantial policy rate cuts totaling 7.25% since May 2023, with a 0.75% cut between March and July 2024 alone. However, these cuts came only after successfully crushing the initial inflation surge through aggressive tightening measures. The Central Bank of Sri Lanka demonstrated an excellent understanding of timing – tightening aggressively when inflation threatened to become entrenched, then easing carefully as conditions stabilised.
Clarity in policy frameworks proved to be equally important through introducing a new single policy rate of 8% in November 2024. This simplicity enabled clearer communication and more predictable policy responses.
As a significant demonstration of fiscal consolidation, Sri Lanka raised its VAT to 18% from 15% in early 2024 to meet revenue targets under its $2.9 billion IMF program. This coordination between fiscal and monetary policy created a coherent anti-inflation strategy, addressing both demand and supply side pressures.
Bangladesh’s Reactive Approach
Bangladesh’s policy response, by contrast, appeared reactive and insufficient. Bangladesh only raised its policy rate by 0.5% in October 2024, marking its fourth hike that year. This piecemeal approach stood in stark contrast to Sri Lanka’s decisive action. Although the current policy rate stands at 10%, showing continued but gradual tightening, the timing of Bangladesh’s response reveals a critical miss in its approach. Allowing policy rates to remain below inflation rates for extended periods essentially provided accommodation when restraint was needed. This policy stance likely contributed to inflation expectations becoming anchored at elevated levels, making subsequent disinflation more difficult and costly.
Both inflation expectations and core inflation remain elevated and well above the authorities’ target range of 5-6% in Bangladesh, indicating that the delayed and gradual policy response failed to convince markets and consumers that authorities were serious about price stability.
Beyond monetary policy, structural factors play a crucial role in inflation dynamics. Structural issues like uncompetitive markets and poor logistics drive up prices in Bangladesh, creating supply-side inflationary pressures that monetary policy alone cannot address. Sri Lanka’s comprehensive reform approach, undertaken as part of its IMF program, addressed these broader structural issues alongside demand management.
This structural dimension further explains why Bangladesh’s inflation has proven so persistent. Without addressing underlying supply constraints, market inefficiencies, and logistic chokepoints, monetary policy must work harder to achieve the same disinflationary impact, potentially at greater cost to economic growth.
Economic Outcomes and Growth Implications
The effectiveness of Sri Lanka’s approach is evident not just in inflation control but also in growth outcomes. Sri Lanka’s economy was expected to grow by 4.5-5% in 2024, demonstrating that aggressive inflation control can segue into prompt economic recovery when properly managed. This challenges the conventional wisdom that disinflation necessarily requires prolonged economic weakness.
However, Sri Lanka’s experience also reveals the limitations of monetary policy when inflation swings too far in the opposite direction. With inflation well below target, the central bank maintained an accommodative stance with its policy rate cuts. Despite lower commercial bank lending and deposit rates, loan growth to the private sector remained slow-paced at 6.9 percent in July 2024, indicating that monetary policy transmission mechanisms can become less effective when economic confidence is low.
In the Bangladesh scenario, we can deduce that allowing inflation to persist may itself constrain growth by eroding purchasing power, creating uncertainty, and forcing eventual, potentially more disruptive policy adjustments.
Learning the Right Lessons
Bangladesh’s experience with persistent inflation represents a missed opportunity to learn from Sri Lanka’s successful stabilisation strategy, but it must be careful to adopt the right lessons while avoiding potential pitfalls. It is crucial to understand both the rewards and the limitations of the Srilankan approach to initiate relevant and effective policies:
What Bangladesh Should Adopt: The lessons are clear regarding proactive policy response: early, aggressive intervention works better than gradual, reactive responses. A transparent policy framework enhances effectiveness by attaining public trust, and structural reforms must complement demand management policies. Bangladesh should embrace Sri Lanka’s decisive approach to inflation targeting, unified policy framework, and coordinated fiscal-monetary policy stance.
What Bangladesh Must Avoid: However, Sri Lanka’s experience with overshooting on disinflation provides equally important lessons. Bangladesh should avoid the deflation trap by understanding when to tame aggressive deflationary policies. If inflation reaches a problematically low level, it may require extensive monetary accommodation that could prove ineffective. Sri Lanka’s struggle with sluggish credit growth despite massive rate cuts demonstrates that the “shock therapy” approach needs to be handled with critical thinking and farsightedness. The key insight is that successful inflation management requires precision, not just aggression. Bangladesh needs policies that bring inflation to target levels without overshooting into deflation territory, maintaining economic confidence throughout the adjustment process.
Author: Tasfia Tahiat Umme
