Sri Lanka hikes rates in face of record inflation, despite economic meltdown (updated)

Celestial Asia Securities Holdings

07/07/2022 09:01

(Adds quotes from press conference)
    By Uditha Jayasinghe and Swati Bhat
    COLOMBO, July 7 (Reuters) - Sri Lankan interest rates hit
their highest level in two decades on Thursday, despite a
devastating economic crisis, as the central bank sought to
dampen record inflation of 54.6%.
    The country is struggling to pay for food, medicine and
fuel, with foreign exchange reserves at a record low. Meanwhile
the economy contracted by an annual 1.6% in the first quarter
and is forecast to have shrunk more in the second.
    Sri Lanka is pushing for a possible $3 billion extended
financing programme from the International Monetary Fund (IMF)
which would help it unlock other bridge financing options to pay
for essential imports.
    Inflation touched a year-on-year record in June, with food
prices rising by 80.1%, prompting the central bank to raise
rates to address the rise in prices.  urn:newsml:reuters.com:*:nB8N2XQ00E
    The Sri Lankan central bank increased its 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 CBSL said.  urn:newsml:reuters.com:*:nL1N2YO035
    The central bank said in a statement that significant
progress had been made in talks with the IMF, while negotiations
are underway with bilateral and multilateral partners to secure
bridge financing and ease the shortfall in reserves.
    "One recommendation in the IMF programme is to support the
poor and vulnerable as high inflation will have the most impact
on them," Governor P. Nandalal Weerasinghe told reporters.
    "We are aware of this need and will work to manage inflation
as much as possible but other measures such as cash transfers
will also be needed to give relief to the poor," he said.
    CBSL expects inflation to touch 70% in the near term and
stay higher for another year but a fall in global crude and
commodity prices may help bring it down sooner, he added.
    The central bank estimates a contraction in growth of 4% to
5% this year, Prime Minister Ranil Wickremesinghe told
parliament on Tuesday, although the government targets a smaller
contraction of 1% in growth next year.
    "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 also said ensuring external sector
stability and overall macroeconomic stability would require
commitment from all stakeholders 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.
 urn:newsml:reuters.com:*:nL1N2YM0FH
    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 by August.

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 (Editing by Raju Gopalakrishnan and Alexander Smith)
 ((swati.bhat@thomsonreuters.com; twitter.com/swatibhat22;
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