Sri Lanka’s central bank raised key interest rates to the highest in two decades to bring down record inflation; despite the country wilting under a devastating economic crisis. With foreign exchange reserves at a record low; the island nation is struggling to pay for essentials like food, medicine, and fuel. Growth has stifled the economy by contract annual 1.6% in the January to March period and expects to have shrunk more in the second quarter.
Inflation though touched a record 54.6% year-on-year in June; while food inflation accelerated to 80.1%, prompting the central bank to raise rates to address the rise in prices as a priority. While negotiations are on with bilateral and multilateral partners to secure bridge financing and ease the shortfall in reserves, the central bank said.
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. The central bank estimates a contraction in growth of 4% to 5% this year; with inflation to hit 60% by year-end, Prime Minister Ranil Wickremesinghe told parliament; though the government targets a smaller contraction of 1% in growth next year.
The IMF indicated the need for stronger fiscal measures to put public finances back on track. And also, boost debt sustainability following a ten-day visit to the country late last month.
Sri Lanka is pushing for a possible $3 billion extended financing programme from the IMF. Which would help it unlock other bridge financing options to pay for essential imports. Sri Lanka hopes to hold a donor conference with the involvement of; China, India and Japan after a staff-level agreement reach with the IMF and will present its debt sustainability framework to the global lender by August.