Sri Lanka doubles interest rates to control inflation; stabilize the economy

  • CBank raises rates by 700 basis points
  • Sri Lanka in the grip of a crippling economic crisis
  • Finance minister calls for debt moratorium and financial aid

COLOMBO, April 8 (Reuters) – Sri Lanka’s central bank on Friday doubled its key rates, raising them each by an unprecedented 700 basis points to rein in inflation that has soared due to crippling commodity shortages caused by a devastating economic crisis.

The heavily indebted country has little money to pay for imports, meaning fuel, electricity, food and, increasingly, medicine are in short supply.

Street protests have been going on almost continuously for more than a month, despite a five-day state of emergency and a two-day curfew.

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The Monetary Board of the Central Bank of Sri Lanka (CBSL) raised its standing lending facility (LKSLFR=ECI) to 14.50% and its standing deposit facility (LKSDFR=ECI) to 13.50%.

Aggregate demand accumulation, domestic supply disruptions, falling local currency and high global commodity prices could keep pressure on inflation, CBSL said in its decision statement of monetary policy.

“The rate hike will give a strong signal to investors and markets that we will get out of this as soon as possible,” Governor P. Nandalal Weerasinghe said during a briefing on the post-policy decision.

INDEPENDENT CENTRAL BANK

Weerasinghe said he wanted to run the central bank independently without any outside influence and had been given permission to do so by the president and was asked to speed up measures to pull the country out of the current crisis.

“I want to be very clear that my message is not a message of blind positivity. Things are tough and we need to take decisive action. Things will get worse before they get better, but we need to apply the brakes. to this vehicle before it crashed,” he added.

Inflation reached 18.7% in March.

One analyst expected increases of up to 400 basis points. Read more

“With monetary policy tightening finally clear, the stage is set to take vital next steps on the IMF and debt restructuring and communicate this clearly to the international arena,” said Thilina Panduwawala, head of economic research. at Frontier Research.

Finance Minister Ali Sabry earlier said the country must urgently restructure its debt and seek external financial aid, as the main opposition threatened a motion of no confidence in the government and heads of company warned that exports could fall.

“We cannot give up repaying the debt because the consequences are terrifying. There is no alternative, we have to restructure our debt,” Sabry told parliament.

JP Morgan analysts estimate Sri Lanka’s gross debt servicing costs will be $7 billion this year, with a $1 billion repayment due in July.

“We have to go for a debt moratorium,” said Sabry, who offered to step down a day after his appointment on Monday but later confirmed he was still finance minister.

“We need to put debt repayments on hold for a while and get bilateral and multilateral support to manage our balance of payments.”

MOTION OF NON-CONFIDENCE?

President Gotabaya Rajapaksa leads his administration with just a handful of ministers after his entire cabinet resigned this week, while opposition and some coalition partners have rejected calls for a unity government to deal with to the worst crisis the country has seen in decades.

At least 41 lawmakers left the ruling coalition to become independents, although the government says it still has a majority in parliament. Read more

“The government must tackle the financial crisis and work to improve governance, otherwise we will propose a motion of no confidence,” Sajith Premadasa, leader of the opposition group Samagi Jana Balawegaya, told parliament.

Sabry, a former justice minister, said political stability was needed as the country prepared to begin talks with the International Monetary Fund (IMF) this month. Weerasinghe said he would hold a virtual meeting with the IMF on April 11.

Earlier Friday, nearly two dozen associations, representing industries that collectively employ a fifth of the country’s 22 million people, together urged the government to quickly seek financial assistance from the IMF, World Bank and the Asian Development Bank (ADB).

Masakorala said exports of goods and services could drop 20-30% this year due to a shortage of dollars, higher transport costs and power cuts.

Sri Lanka’s foreign exchange reserves have plunged by around 70% over the past two years, reaching $1.93 billion at the end of March.

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Written by Krishna N. Das; Additional reporting by Swati Bhat; Editing by Muralikumar Anantharaman, Raju Gopalakrishnan, Hugh Lawson and John Stonestreet

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