Sri Lanka doubles interest rates to tame inflation as crisis takes hold

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COLOMBO — Sri Lanka’s central bank doubled its key interest rates on Friday, raising each an unprecedented 700 basis points to rein in inflation that has soared due to crippling crisis-induced commodity shortages devastating economy.

The heavily indebted country has little money to pay for imports, meaning fuel, electricity, food and, increasingly, medicine are in short supply.

Street protests have been going on almost continuously for more than a month, despite a five-day state of emergency and a two-day curfew.

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The Monetary Board of the Central Bank of Sri Lanka (CBSL) raised its standing lending facility to 14.50% and its standing deposit facility to 13.50%.

He cited “inflationary pressures that could intensify further… driven by the accumulation of aggregate demand, disruptions in domestic supply, exchange rate depreciation and high commodity prices in the global scale”. Inflation reached 18.7% in March.

One analyst expected increases of up to 400 basis points.

Thilina Panduwawala, head of economic research at Frontier Research, said the rise showed that the new CBSL governor, P. Nandalal Weerasinghe, was serious about resolving the crisis.

“With monetary policy tightening finally clear, the stage is set to take vital next steps regarding the IMF and debt restructuring and communicate this clearly to the international arena,” Panduwawala said.

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Finance Minister Ali Sabry earlier said the country must urgently restructure its debt and seek external financial aid, as the main opposition threatened a motion of no confidence in the government and heads of company warned that exports could fall.

“We cannot give up repaying the debt because the consequences are terrifying. There is no alternative, we have to restructure our debt,” Sabry told parliament.

JP Morgan analysts estimate Sri Lanka’s gross debt servicing costs will be $7 billion this year, with a $1 billion repayment due in July.

“We have to go for a debt moratorium,” said Sabry, who offered to step down a day after his appointment on Monday but later confirmed he was still finance minister.

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“We need to put debt repayments on hold for a while and get bilateral and multilateral support to manage our balance of payments.”

MOTION OF NON-CONFIDENCE?

President Gotabaya Rajapaksa leads his administration with just a handful of ministers after his entire cabinet resigned this week, while opposition and some coalition partners have rejected calls for a unity government to deal with to the worst crisis the country has seen in decades.

At least 41 lawmakers left the ruling coalition to become independents, although the government says it still has a majority in parliament.

“The government must tackle the financial crisis and work to improve governance, otherwise we will propose a motion of no confidence,” Sajith Premadasa, leader of the opposition group Samagi Jana Balawegaya, told parliament.

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Sabry, a former justice minister, said political stability was needed as the country prepared to begin talks with the International Monetary Fund (IMF) this month.

Earlier Friday, nearly two dozen associations, representing industries that collectively employ a fifth of the country’s 22 million people, together urged the government to quickly seek financial assistance from the IMF, World Bank and the Asian Development Bank (ADB).

“We need a solution within a few weeks, otherwise the country will fall from the precipice,” Rohan Masakorala, chief executive of the Sri Lanka Association of Rubber Products Manufacturers and Exporters, told a conference. Press.

Masakorala said exports of goods and services could drop 20-30% this year due to a shortage of dollars, higher transport costs and power cuts.

Sri Lanka’s foreign exchange reserves have plunged by around 70% over the past two years, reaching $1.93 billion at the end of March.

(Writing by Krishna N. Das; Additional reporting by Swati Bhat; Editing by Muralikumar Anantharaman, Raju Gopalakrishnan, Hugh Lawson and John Stonestreet)

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