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Sri Lanka Holds Rates Steady as $130m Funding Pays for Fuel

The bank said inflation would remain elevated in the near-term due to supply-side pressures while economic growth will also record a setback


The nation of 22 million people is battling a devastating economic crisis as tax cuts by President Gotabaya Rajapaksa drained government coffers. Photo: Reuters

 

Sri Lanka held key interest rates steady on Thursday as $130 million flowed in from the World Bank and remittance payments to enable the country to buy urgently needed fuel and cooking gas.

Its central bank reiterated a need for more fiscal and political stability in the crisis-hit economy and said fiscal and legal restructuring plans would be submitted to the government on Friday.

Inflation would remain elevated in the near-term due to supply-side pressures while economic growth will also record a setback, the bank noted.

The Standing Lending Facility rate remained unchanged at 14.50% while the Standing Deposit Facility Rate was steady at 13.50%.

The bank raised rates by a massive 700 basis points at its previous meeting.

“It is envisaged that the recent tightening of monetary conditions and the strengthening of monetary policy communication will help anchor inflation expectations of the public in the period ahead,” the bank said in a statement.

 

ALSO SEE: Sri Lanka Braces for Ratings Default Over Missed Payments

 

 

Tighter Monetary Policy

The measures taken so far, “would continue to be further transmitted to the financial markets, while some signs of tighter monetary policy already being observed in real economic activity”, the bank added.

The nation of 22 million people is battling a devastating economic crisis as tax cuts by President Gotabaya Rajapaksa drained government coffers, Covid-19 hit the lucrative tourism industry and rising oil prices emptied foreign exchange reserves.

Foreign reserves have plunged to almost zero, leaving Colombo struggling to pay for such essentials as fuel, medicines and food.

The central bank said fuel that had been stranded at Colombo port had been cleared and would be distributed.

“In terms of credibility of policy… keeping rates unchanged is not good in my view,” said Thilina Panduwawala, head of economic research at Frontier Research.

Inflation hit 29.8% in April with food prices expanding by 46.6% year-on-year in the island nation.

 

  • Reuters, with additional editing by George Russell

 

 

READ MORE:

How Sri Lanka Spiralled Into Crisis And Who is Helping Them

Sri Lanka Streets Calm After State of Emergency Declared

Debt-Ridden Sri Lanka to Seek New Help From World Bank

 

 

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George Russell

George Russell is a freelance writer and editor based in Hong Kong who has lived in Asia since 1996. His work has been published in the Financial Times, The Wall Street Journal, Bloomberg, New York Post, Variety, Forbes and the South China Morning Post.