- CBank hikes rates by 700 basis points
- Sri Lanka is being hit by a crippling economic crisis
- Finance Minister requests debt moratorium, financial aid
COLOMBO, April 8 (Reuters) – Sri Lanka’s central bank doubled interest rates on Friday, raising them by an unprecedented 700 basis points each to tame inflation spiraling due to crippling shortages of basic goods sparked by a devastating economic crisis has soared.
The heavily indebted country has little money left to pay for imports, meaning fuel, electricity, food and, increasingly, medicine are in short supply.
Despite a five-day state of emergency and a two-day curfew, street protests have been going on almost continuously for more than a month.
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The Monetary Board of the Central Bank of Sri Lanka (CBSL) increased its standing credit facility (LKSLFR=ECI) to 14.50% and its standing deposit facility (LKSDFR=ECI) to 13.50%.
Build-up in aggregate demand, domestic supply disruptions, collapsing local currency and high global commodity prices could keep inflation under pressure, CBSL said in its policy decision statement.
“The rate hike will send a strong signal to investors and markets that we are getting out of this situation as soon as possible,” Governor P. Nandalal Weerasinghe said at a briefing after the policy decision.
INDEPENDENT CENTRAL BANK
Weerasinghe said he wants to run the central bank independently and without outside influence, and he has been given the power to do so by the president and has been asked to accelerate action to get the country out of the current crisis.
“I want to be very clear that my message is not blind positivity. Things are challenging and we must act decisively. Things are going to get worse before they get better, but we need to apply the brakes to this vehicle before it crashes,” he added.
Inflation reached 18.7% in March.
One analyst had expected increases of up to 400 basis points. Continue reading
“With monetary tightening now finally clear, the stage is set to take the next important steps regarding the IMF and debt restructuring and communicate this clearly on the international stage,” said Thilina Panduwawala, Head of Economic Research at Frontier Research.
Demonstrators tear down metal barriers as they try to enter the main road to parliament during a protest against Sri Lankan President Gotabaya Rajapaksa near Parliament amid the country’s economic crisis in Colombo, Sri Lanka April 8, 2022. REUTERS/Dinuka Liyanawatte
Finance Minister Ali Sabry earlier said the country urgently needed to restructure its debt and seek external financial assistance, while the main opposition threatened a no-confidence motion in the government and business leaders warned exports could collapse.
“We cannot refrain from paying off debt because the consequences are appalling. There is no alternative, we must restructure our debt,” Sabry told parliament.
JP Morgan analysts estimate Sri Lanka’s gross debt service costs this year to be US$7 billion, with a US$1 billion repayment due in July.
“We have to decide on a debt moratorium,” said Sabry, who tendered his resignation a day after his appointment on Monday but later confirmed he was still finance minister.
“We need to suspend debt repayments for some time and get bilateral and multilateral support to manage our balance of payments.”
motion of no confidence?
President Gotabaya Rajapaksa is leading his government with just a handful of ministers after his entire cabinet resigned this week, while the opposition and some coalition partners rejected calls for a unity government to deal with the country’s worst crisis in decades.
At least 41 lawmakers have left the ruling coalition to become independent, although the government says it still has a majority in parliament. Continue reading
“The government must address the financial crisis and work to improve governance or we will table a motion of no confidence,” Sajith Premadasa, leader of the opposition group Samagi Jana Balawegaya, said in parliament.
Sabry, a former justice minister, said political stability was needed as the country prepares to start talks with the International Monetary Fund (IMF) this month. Weerasinghe said he will hold a virtual meeting with the IMF on April 11.
Earlier on Friday, nearly two dozen associations representing industries that collectively employ a fifth of the country’s 22 million people jointly called on the government to quickly apply for financial aid from the IMF, the World Bank and the Asian Development Bank (ADB).
Masakorala said both goods and services exports could fall by 20% to 30% this year due to dollar shortages, higher freight costs and power outages.
Sri Lanka’s foreign exchange reserves have plummeted by about 70% over the past two years, reaching US$1.93 billion at the end of March.
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Writing from Krishna N. Das; Additional reporting by Swati Bhat; Edited by Muralikumar Anantharaman, Raju Gopalakrishnan, Hugh Lawson and John Stonestreet
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