Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2021=100)1 decreased to 4.0% in August 2023 from 6.3% in July 2023. The decline in the headline inflation is mostly in line with the projections envisaged by the Central Bank of Sri Lanka (CBSL) in July 2023.

The Food deflation (Y-o-Y) continued for the second consecutive month recording 4.8% in August 2023 from 1.4% in July 2023. Meanwhile, the Non-Food inflation (Y-o-Y) decreased further to 8.7% in August 2023 from 10.5% in July 2023. Monthly change of CCPI recorded at -0.02% in August 2023 due to the combined effect of price decreases of -0.41% observed in the items of Food category and price increases of 0.39% recorded in the items of Non-Food category. The core inflation (Y-o-Y), which reflects the underlying inflation in the economy, decreased to 4.6% in August 2023 from 5.9%* in July 2023.

As a result of the policy measures taken thus far, and well anchored inflation expectations, inflation is expected to stabilise around mid-single digit levels over the medium term.

The construction industry continued to perform at a subdued level in July 2023, recording a Total Activity Index value of 43.2. As per the respondents, most firms remain hibernated amid the challenging industry environment. However, the gradual decline in material cost had provided a conducive environment for the limited ongoing projects. Further, some temporarily suspended government-funded projects resumed at a modest scale during the month.

The New Orders contracted, yet at a slower rate in July. Many respondents highlighted that tendering opportunities are mostly limited to foreign-funded projects, while private clients are still waiting for further reductions in cost. Moreover, sub-contract openings are also scarce as firms with projects in hand possess extra capacities. Meanwhile, Employment decreased further during the month since firms tend to retain only the key staff. Further, Quantity of Purchases continued to decline during the month as most of the firms are in a wait-and-see stance, only fulfilling the short-term requirements. In the meantime, Suppliers’ Delivery Time broadly remained stable during the month, and some respondents mentioned that supplier credit facilities are also becoming available.

The sentiment amongst the firms towards the next three months broadly remained positive, mainly due to the expected recovery in the economy, the decrease in interest rates and material costs, and current negotiations on the recommencement of  suspended governmentfunded projects.