Colombo: Sri Lanka On Thursday, it raised interest rates to the highest level in two decades, saying it would have to avoid rushing inflation to avoid even deeper pain for an economy already in crisis and shrinking.
Sri Lanka’s central bank raised its permanent lending facility rate by 100 basis points to 15.50%, while the fixed deposit facility rate was similarly raised to 14.50%, the highest since August 2001.
Inflation touched a record 54.6% year-on-year in June, and central bank governor P. Nandlal Veerasinghe said it could go up to 70%, prompting the central bank to raise rates to address the rise in prices.
“We will work to manage inflation as much as possible but other measures like cash transfers will also be needed to provide relief to the poor,” he told reporters.
An interest rate increase, however, would further curtail economic growth in the island nation.
The country is struggling to pay for food, medicine and fuel, with foreign exchange reserves at record lows. The economy contracted by 1.6% annually in the first quarter and is projected to shrink further in the second quarter.
Sri Lanka pushing for expanded financing program of potential $3 billion International Monetary Fund ,International Monetary Fund) which will help it to unlock other bridge financing options for payment of essential imports.
In a statement, the central bank said significant progress has been made in talks with the IMF, while talks are underway with bilateral and multilateral partners to secure bridge financing and reduce the shortfall in reserves.
“One of the recommendations in the IMF program is to support the poor and vulnerable because high inflation will have the greatest impact on them,” Weerasinghe said.
He said the central bank expects inflation to reach 70% in the near future and remain high for another year, but a fall in global crude and commodity prices may help bring it down soon.
The central bank forecasts a contraction in growth from 4% to 5% this year, Prime Minister Ranilo Wickremesinghe told parliament on Tuesday, although the government targets a small contraction of 1% in growth next year.
“Perhaps after discussions with the IMF, there has been a change in the stance of the central bank,” said Dimantha MathewHead of Research in the first capital.
“I don’t think they’re worried about growth at all and they’ve focused on easing currency pressure and printing money to stabilize the economy,” he said.
The central bank also said that ensuring external sector stability and overall macroeconomic stability would require commitment from all stakeholders and called for coherent and coherent action from the government.
“There is a need for rapid implementation of the fiscal reforms expected to be aimed at consolidating government revenue and rationalizing expenditure,” it said, adding that improvements in the financial position of state-owned enterprises were also important.
It said these measures would reduce government financing needs over time and help reduce monetary financing at a faster pace.
Wickremesinghe told parliament last month that Sri Lanka would present an interim budget in parliament in August, which would include new revenue measures and spending cuts.
The IMF signaled the need for stronger fiscal measures to get public finances back on track and boost debt stability after a ten-day visit to the country late last month.
After reaching a staff-level agreement with the IMF, Sri Lanka hopes to hold a donor conference with participation from China, India and Japan and present its debt stability framework by August.
Sri Lanka’s central bank raised its permanent lending facility rate by 100 basis points to 15.50%, while the fixed deposit facility rate was similarly raised to 14.50%, the highest since August 2001.
Inflation touched a record 54.6% year-on-year in June, and central bank governor P. Nandlal Veerasinghe said it could go up to 70%, prompting the central bank to raise rates to address the rise in prices.
“We will work to manage inflation as much as possible but other measures like cash transfers will also be needed to provide relief to the poor,” he told reporters.
An interest rate increase, however, would further curtail economic growth in the island nation.
The country is struggling to pay for food, medicine and fuel, with foreign exchange reserves at record lows. The economy contracted by 1.6% annually in the first quarter and is projected to shrink further in the second quarter.
Sri Lanka pushing for expanded financing program of potential $3 billion International Monetary Fund ,International Monetary Fund) which will help it to unlock other bridge financing options for payment of essential imports.
In a statement, the central bank said significant progress has been made in talks with the IMF, while talks are underway with bilateral and multilateral partners to secure bridge financing and reduce the shortfall in reserves.
“One of the recommendations in the IMF program is to support the poor and vulnerable because high inflation will have the greatest impact on them,” Weerasinghe said.
He said the central bank expects inflation to reach 70% in the near future and remain high for another year, but a fall in global crude and commodity prices may help bring it down soon.
The central bank forecasts a contraction in growth from 4% to 5% this year, Prime Minister Ranilo Wickremesinghe told parliament on Tuesday, although the government targets a small contraction of 1% in growth next year.
“Perhaps after discussions with the IMF, there has been a change in the stance of the central bank,” said Dimantha MathewHead of Research in the first capital.
“I don’t think they’re worried about growth at all and they’ve focused on easing currency pressure and printing money to stabilize the economy,” he said.
The central bank also said that ensuring external sector stability and overall macroeconomic stability would require commitment from all stakeholders and called for coherent and coherent action from the government.
“There is a need for rapid implementation of the fiscal reforms expected to be aimed at consolidating government revenue and rationalizing expenditure,” it said, adding that improvements in the financial position of state-owned enterprises were also important.
It said these measures would reduce government financing needs over time and help reduce monetary financing at a faster pace.
Wickremesinghe told parliament last month that Sri Lanka would present an interim budget in parliament in August, which would include new revenue measures and spending cuts.
The IMF signaled the need for stronger fiscal measures to get public finances back on track and boost debt stability after a ten-day visit to the country late last month.
After reaching a staff-level agreement with the IMF, Sri Lanka hopes to hold a donor conference with participation from China, India and Japan and present its debt stability framework by August.