As Sri Lanka continues to deal with its most devastating economic crisis yet, Sri Lanka’s apex bank raises interest rates to their highest in more than two decades, a move experts believe will help the country confront record inflation numbers.
With the country’s foreign exchange reserve at a record low, Sri Lanka is struggling to pay for essential commodities, including food, medicine and fuel. Meanwhile, economic activities in the island nation have stifled, especially with the economy contracting by 1.6% between January and March. And analysts expect things to get worse in the second quarter.
Sri Lanka has continued to battle rising inflation, with new figures putting the country’s current inflation at nearly 54.2% year-on-year in June. Meanwhile, food inflation has skyrocketed to 80.1%, forcing the country’s apex bank to raise rates in a bid to combat the rise in prices of basic items.
Sri Lanka’s central bank has increased the standing lending facility by 100 basis points, which signals a 15.50% increase. On the flip side, the standing deposit rate has also gone up by 14.50%, its highest level since August 2021.
In a statement, the central bank stated that its new monetary policy tightening would help fend off any adverse effects should inflation continue to bite hard.
While the Sri Lankan government keeps working on a deal with the International Monetary Fund (IMF) for a credit facility, negotiations are ongoing with bilateral and multilateral partners to get bridge financing. The government believes these moves will help ease the shortfall in reserves.
The apex bank estimates a contraction in growth between 4% to 5% this year, with inflation
expected to reach as high as 60% by year-end. While Prime Minister Ranil Wickremesinghe told parliament earlier during the week that the government is looking to push contraction lower to about 1%, analysts believe the country isn’t doing enough to achieve that feat.
The central bank also added that ensuring external sector stability and overall micro-economic boost will require commitment from all stakeholders in the country. It further calls for proactive and consistent action from all parties, including the central government.