Sri Lanka continues to raise interest rates to fight inflation
2023.03.04 01:09
Sri Lanka continues to raise interest rates to fight inflation
By Kristina Sobol
Budrigannews.com – The International Monetary Fund (IMF) stated on Saturday that Sri Lanka’s decision to raise interest rates demonstrates the country’s commitment to reducing inflation quickly to levels in the single digits.
The South Asian nation’s central bank raised interest rates by 100 basis points on Friday in an unexpected move to combat 50.6% inflation. In the midst of its worst financial crisis since its independence from Britain in 1948, the government is awaiting approval of a $2.9 billion IMF bailout package.
The IMF stated in a statement that “Sri Lanka’s inflation is declining but remains at a very high level, which has been disproportionally hurting the poor.” Risks associated with upside inflation could cause the trend to reverse and result in persistently high inflation, which would be extremely costly for the economy.
According to the global lender, sustained disinflation would support recovery by enhancing market confidence in the island nation, lowering excessive risk premiums on government securities, and easing financing conditions for businesses.
In an effort to secure the bailout, the central bank raised its standing deposit facility rate to 15.50 percent and its standing lending facility rate to 16.50 percent. Additionally, it stated that it would loosen its currency band in order to move toward an exchange rate that is determined by the market.
To contain the country’s financial crisis, the bank increased rates by 950 basis points in the first half of last year. However, analysts and economists were largely unprepared for the rate hike on Friday, which was the first since July.
Additionally, the IMF supported this year’s tax hikes and power tariff increases, which have sparked protests from public sector employees demanding a more equitable tax policy from the government.
The chief of Sri Lanka’s central bank stated on Friday that the country is pushing for the completion of a four-year Extended Fund Facility and anticipates receiving approval from the IMF board this month.
