Sri Lanka’s commitment to reducing inflation quickly towards single-digit levels is evident as the country’s central bank raised interest rates by 100 basis points, according to the International Monetary Fund (IMF). In a surprise move, the country’s central bank raised rates to battle inflation, which is at 50.6%, as the government awaits approval of a $2.9 billion IMF bailout package amid its worst financial crisis since gaining independence from Britain in 1948.
IMF Backs Sri Lanka’s Efforts to Combat Inflation
The IMF supports Sri Lanka’s efforts to reduce inflation quickly and believes that durable disinflation would boost market confidence in the country, reduce excessive risk premia of government securities, and ease the financing conditions for companies, which supports recovery. The global lender said that high inflation has disproportionately hurt the poor and that upside inflation risks could reverse the trend and lead to persistently high inflation, which is costly to the economy.
Sri Lanka’s Central Bank Raises Interest Rates to Combat Inflation
Sri Lanka’s central bank raised its standing deposit facility rate to 15.50% and its standing lending facility rate to 16.50% while relaxing its currency band to move towards a market-determined exchange rate to secure the bailout. The bank raised rates by 950 bps in the first half of last year to contain the country’s financial crisis. However, Friday’s rate hike, the first since July, was largely unexpected by analysts and economists.
IMF Supports Tax Hikes and Power Tariff Increases
The IMF also supported the tax hikes and power tariff increases implemented this year, which have drawn protests from public workers who demand a fairer taxation policy from the government. Sri Lanka is pushing for finalization of a four-year Extended Fund Facility and is expecting IMF board level approval this month, according to its central bank chief.
Conclusion
Sri Lanka’s decision to raise interest rates to combat inflation shows the country’s commitment to reducing inflation quickly towards single-digit levels, according to the IMF. The global lender believes that durable disinflation would help boost market confidence, reduce excessive risk premia of government securities, and ease financing conditions for companies. The bank’s move to raise rates by 100 basis points was largely unexpected but necessary, given the country’s financial crisis. The IMF also supports Sri Lanka’s tax hikes and power tariff increases and is expected to finalize a four-year Extended Fund Facility soon.
