ECONOMYNEXT – Sri Lanka’s cabinet has approved the resumption of Lower Malwathu Oya multipurpose hydro power project, which was halted following the Coronavirus epidemic and a currency crisis which ended in default triggered by aggressive rate cuts to boost growth.
The cabinet had given approval in July 19, 2019 for the Lower Malwathu Oya project with an estimated cost of 22.9 billion rupees.
The revised cost of the project submitted to cabinet in December 2025 was 47.18 billion rupees.
The revised price indicates a rise in the rupee cost of 106.02 percent between 2019 and 2025.
Between July 2029 and December 2028, the rupee had collapsed from 176 to the US dollar to 308 after the rate cuts enforced by aggressive open market operations as well as tax cuts in 2019/2020 to boost potential output under the flexible inflation targeting framework.
Sri Lanka ran into serial currency crises after the end of a 30-year civil war by trying to operate and inflation targeting framework (independent monetary policy) without a clean float.
The currency collapse indicates an inflation of the rupee of 74 percent between July 2019 and November 2025.
In the period of July 2019 to September 2025 the US Consumer Price Index for All Urban Consumers (CPI-U) had risen from 255.21 points to 324.36 or about 27 percent.
The October data is not available due to the US government shutdown.
US inflation surged particularly in 2021 and 2022 after rate cuts made under its ‘single policy rate’ (floor system) and continues to rise with public discontent and a rise in white nationalism and economic nationalism involving anti-immigration policy and import taxes.
US government finances have also deteriorated and is facing downgrades.
Under high inflation budgets become unmanageable as costs became moving targets like the Malwathu Oya scheme and therefore deficits. Before the ‘age of inflation’, and especially before 1971, a simple tax hike pushed deficit budgets into surplus and the national debt came down absolutely.
In the 1980s after the IMF’s Second Amendment to its articles allowed depreciation, defaulting countries, especially in Latin America went into serial defaults.
Now, with deliberately created cost of living increases to reach floor ‘inflation targets’, macro-economists have to use complex statistics to model budget deficits as costs catch up with tax revenues.
Sri Lanka’s budgets went haywire from the early 1980s as the rupee depreciated, even as the US got inflation under control as the central bank tried to target money supply without a clean floating exchange rate.
The Malwathu Oya scheme aimds to boost water supplies to 24,450 acres of existing farmland under the Giant’s Tank, 6,230 acres under the Akitamuruppu tank and irrigate 2,000 acres of new land. It will also generate 4.28 GigaWatts of hydro power and provide 2 million cubic metres of drinking water.
(Colombo/Dec17/2025)
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