Crisis-hit Sri Lanka hikes interest rates

SRI LANKA's central bank hiked interest rates Thursday (20) in a bid to tame rampant inflation and discourage consumer spending as the country suffers a foreign currency shortage and teeters on the brink of default.

The island nation of around 22 million has seen shortages of food and fuel as well as electricity rationing, with rating agencies warning it might not be able to meet repayments on its debts. Inflation hit a record 12.1 per cent last month.

The central bank raised the benchmark deposit and lending rates by 50 basis points each to 5.5 per cent and 6.5 per cent respectively. The hike was the first since August.

It said in a statement that the higher borrowing costs would encourage savings and discourage consumption, thereby reducing demand for imports at a time when the country's foreign reserves were under pressure.

"We want to give a very clear message that... inflation was being dealt with," bank governor Ajith Nivard Cabraal told reporters.

The island's tourism sector and worker remittances, the government's main sources of income, have been battered by the pandemic.

It said the economy grew 4.0 per cent last year, having suffered a record 3.6 per cent contraction in 2020.

Colombo insists it will honour obligations on its $35 billion in external debt, and Cabraal again insisted that a bailout from the International Monetary Fund was unnecessary.

"People have a fixation on the IMF... don't you have an idea of our programmes?" he said. "Our programmes have a huge amount of merit."

Economists have urged Colombo to ask the IMF for help in restructuring the $6.9 billion in foreign debt repayments due this year.

But Cabraal said he was confident that further tightening of foreign exchange restrictions would allow Sri Lanka to weather the crisis.

The new rules require all non-residents to pay for goods and services in foreign currency from Thursday, in a move Cabraal said was needed to give banks more dollar liquidity.

(AFP)