Sri Lanka's Flexible Inflation Targeting: Accountability in Action or Paper Promise?

As part of a recent coursework exercise analyzing inflation-targeting countries, I turned the lens on Sri Lanka's own monetary policy evolution. What started as a simple exercise revealed deeper questions about how well our Central Bank of Sri Lanka (CBSL) sticks to its targets and who holds them accountable when it doesn't.

Sri Lanka rolled out an enhanced monetary policy framework in 2015, blending monetary targeting with flexible inflation targeting. This shifted decisively in 2023 when flexible inflation targeting (FIT) became the law via the Central Bank of Sri Lanka Act No. 16. The target? Keep headline inflation at 5%, with a flexible ±2% band, meaning it shouldn't dip below 3% or rise above 7%. From October 2023 onward, CBSL committed to this under the Monetary Policy Framework Agreement.

Accountability kicks in through a clear legal mechanism. If the Colombo Consumer Price Index (CCPI) headline inflation, calculated as the three-month average for the quarter—breaches the band for two straight quarters, CBSL's Monetary Policy Board must submit a detailed report to Parliament via the Minister of Finance. These reports outline the reasons for the deviation, planned remedial actions, and timelines to realign inflation.

Breaches in the Spotlight

Check the graph below—the yellow shaded zones highlight repeated breaches after the implementation of FIT in late 2023

Since FIT became law, CBSL has filed multiple such reports for persistent failures, covering:

- 2024 Q2

- 2024 Q3

- 2024 Q4

- 2025 Q1

- 2025 Q2

- 2025 Q3

These are publicly available in Accountability to the Parliament | Central Bank of Sri Lanka

CBSL's defenses often highlight supply-side shocks like global commodity spikes or domestic disruptions that monetary policy can't fully tame. Fair point, but it leaves the ball in the Minister's court (and Parliament's, via committees like COPF) to scrutinize and push for fixes. The catch? Effective oversight demands solid economics know-how, which isn't always a given among decision-makers.

It is then the responsibility of the Minister of Finance and Parliament to review these reports, question CBSL where necessary (for example through committees like COPF), and decide what policy or legislative responses are appropriate—even though, in practice, this can be challenging if key decision‑makers have limited knowledge of economics and finance.​