Two weeks ago, Prime Minister Ranil Wickremesinghe told lawmakers the economy had “collapsed”. On Wednesday, he announced he had called Russian leader Vladimir Putin to ask for credit support to help the country import fuel.
The central bank said it had raised its permanent deposit facility rate by 100 basis points to 14.50%. This move should help attract more funds into the banking sector. It also raised the rate on the standing lending facility it charges commercial banks by 100 basis points to 15.50%.
These rates were last so high in 2001.
The bank said it planned to tighten monetary policy further to fully curb inflation, which hit nearly 55% in June, while food inflation topped 80%.
The bank raised key rates by 700 basis points each in April, roughly doubling them and surprising economists as it struggled to lower inflation. Previously, Fitch Solutions Country Risk & Industry Research forecast that it would raise the standing deposit facility rate to 16.50% and the standing lending facility rate to 17.50% by the end of the year. .
“Our priority is to bring inflation down to at least a reasonable level as soon as possible. The sooner the better,” central bank governor Nandalal Weerasinghe said.
Many central banks, including the US Federal Reserve, raised interest rates to keep inflation from spiraling out of control. But Sri Lanka faces problems of a different magnitude.
The prices of most basic necessities have tripled in recent months and most people are struggling to afford basic necessities. About 70% of Sri Lankan households surveyed by UNICEF in May said they had reduced their food consumption. Many families depend on government rice donations and charitable donations.
The central bank said Sri Lanka’s economy is expected to have contracted 1.6% year-on-year in the first quarter of the year. Fuel and electricity shortages further weighed on economic activity in April-June.
Even though the economy has already slowed, interest rate hikes would help temper expectations of further price hikes, helping bring inflation back to a target of 6% to 7%, the central bank said in a statement. communicated.
Due to severe fuel and power shortages, Sri Lanka has closed schools for weeks, while the government has asked state employees other than those in essential services to work from home.
This week, three-hour daily blackouts went into effect.
Tied by dwindling foreign exchange reserves, Sri Lanka suspended repayment of foreign debts worth about $7 billion that were due this year.
The country is negotiating with the International Monetary Fund over a bailout, but Wickremesinghe, the prime minister, said this week the negotiations were proving complex and difficult because Sri Lanka is effectively bankrupt.
The economic collapse sparked a political crisis, with widespread anti-government protests erupting across the country. Demonstrators blocked major roads to demand petrol and fuel, and TV stations showed residents in some areas fighting over limited supplies.
In the capital, Colombo, demonstrators have occupied the entrance to the president’s office for more than two months to demand the resignation of President Gotabaya Rajapaksa. They accuse him and his powerful family, which includes several siblings who until recently held high government positions, of precipitating the crisis through corruption and mismanagement.