Sri Lanka c.bank raises rates, targets inflation despite contraction in economy

Celestial Asia Securities Holdings

07/07/2022 06:44

By Uditha Jayasinghe and Swati Bhat
    COLOMBO, July 7 (Reuters) - Sri Lanka's central bank raised
key interest rates to the highest in two decades on Thursday to
bring down record inflation, despite the country wilting under a
devastating economic crisis.
    With foreign exchange reserves at a record low, the island
nation is struggling to pay for essentials like food, medicine
and fuel. Growth has been stifled - the economy contracted an
annual 1.6 percent in the January to March period and is
expected to have shrunk more in the second quarter.
    Inflation though touched a record 54.6% year-on-year in June
while food inflation accelerated to 80.1%, prompting the central
bank to raise rates to address the rise in prices as a priority.
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    The bank increased the standing lending facility rate
 LKSLFR=ECI  by 100 basis points to 15.50% while the standing
deposit facility rate  LKSDFR=ECI  was similarly raised to
14.50%, the highest since August, 2001.
    "The Board was of the view that a further monetary policy
tightening would be necessary to contain any build-up of adverse
inflation expectations," the central bank said in a statement.
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    There has been significant progress made in negotiations
with the International Monetary Fund (IMF) for a credit facility
while negotiations are on with bilateral and multilateral
partners to secure bridge financing and ease the shortfall in
reserves, the central bank said.
    "There has been a change in stance from the central bank,
perhaps following discussions with the IMF," said Dimantha
Mathew, Head of Research at First Capital.
    "I don't think they are concerned about growth at all and
have shifted focus to easing currency pressure and money
printing to stabilise the economy," he added.
    The central bank estimates a contraction in growth of 4% to
5% this year, with inflation to hit 60% by year-end, Prime
Minister Ranil Wickremesinghe told parliament on Tuesday, though
the government targets a smaller contraction of 1% in growth
next year.
    The central bank also said ensuring external sector
stability and overall macroeconomic stability would require
commitment from all stakeholders in the economy and it called
for coherent and consistent action, including from the
government.
    "Faster implementation of the expected fiscal reforms aimed
at strengthening government revenue and expenditure
rationalisation is needed," it said, adding that improvements in
the financial position of state-owned enterprises were also key.
    It said these measures would over time would lead to a
decline in government financing needs and help scale down
monetary financing at a faster pace.
    Sri Lanka is scheduled to present an interim budget to
parliament in August, which will include new revenue measures
and cut expenditure, Wickremesinghe told parliament last month. 
    The IMF indicated the need for stronger fiscal measures to
put public finances back on track and boost debt sustainability
following a ten-day visit to the country late last month.
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    Sri Lanka is pushing for a possible $3 billion extended
financing programme from the IMF which would help it unlock
other bridge financing options to pay for essential imports.
    Sri Lanka hopes to hold a donor conference with the
involvement of China, India and Japan after a staff level
agreement is reached with the IMF and will present its debt
sustainability framework to the global lender by August.

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Sri Lanka hikes interest rates    https://tmsnrt.rs/3v7zmKl
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 (Editing by Raju Gopalakrishnan)
 ((swati.bhat@thomsonreuters.com; twitter.com/swatibhat22;
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