Sri Lanka expects financial assistance from IMF
2023.01.25 06:46
Sri Lanka expects financial assistance from IMF
By Kristina Sobol
Budrigannews.com – The prevailing tight monetary stance is essential to taming still-high inflation and restoring economic stability, the central bank of Sri Lanka stated on Wednesday, as was widely anticipated, while maintaining interest rates for a third consecutive meeting.
The 22 million-person island nation is in the grip of its worst economic crisis since it gained independence from Britain in 1948 and is vying for a $2.9 billion IMF funding package.
The Standing Deposit Facility Rate remained unchanged at 14.50%, maintaining its highest level since August 2001, while the Standing Lending Facility Rate remained unchanged at 15.50%.
According to a statement released by the Central Bank of Sri Lanka (CBSL), “The Board… was of the view that the maintenance of the prevailing tight monetary policy stance is imperative to ensure that monetary conditions remain sufficiently tight to rein in inflationary pressures.”
According to Udeeshan Jonas, chief strategist at CAL Group:
“Market rates are adjusting as expected, so there was no need to touch policy rate.”
Between August 2021 and July 2022, the CBSL raised interest rates by a staggering 950 basis points to combat inflation. A lack of foreign currency, a collapse in the rupee, a severe recession, and a slowdown in global growth are just a few of the issues facing policymakers today.
According to CBSL Governor P. Nandlal Weerasinghe, there was little room for rate cuts until the position of the foreign exchange reserves stabilized.
However, he stated that the market can support approximately $1 billion in imports and that the situation has improved.
According to CBSL’s statement, tight monetary and fiscal policies will help bring inflation down to desired levels by the end of 2023 and restore price and economic stability over the medium term.
In December, consumer inflation slowed to 57.2% from a peak of 68.9% in September.
Weerasinghe stated in a speech to the private sector on Tuesday that Sri Lanka is committed to meeting all of its debt repayments and hopes to conclude debt restructuring negotiations within the next six months. At the news conference today, he also expressed optimism regarding talks with creditors.
He stated to reporters:
“If IMF gets assurances, then expect the program to be unlocked in the first quarter of this year.”
Last week, India told the IMF that it strongly supports Sri Lanka’s plan to restructure its debt. This is a crucial endorsement for Colombo as it tries to secure the $2.9 billion, four-year program from the international lender.
Thilina Panduwawala, head of research at Frontier Research in Colombo, stated, “It is important CBSL is clear in their communications about domestic debt restructuring, whatever the eventual decision is, since that’s the big driver of the risk premia attached to market rates.”
Weerasinghe stated that domestic debt restructuring should not be discussed at this time.
The central bank stated that market interest rates have begun to fall and are anticipated to fall further.
From a peak of around 32% earlier this month, interest rates on three-month government securities have decreased to around 30%.
Jonas of the CAL Group stated:
“They may only start looking at policy rate revisions once inflation makes a substantial turn and the IMF deal is through.”
