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Colombo, Sri Lanka – Sri Lanka’s central bank has raised interest rates to the highest level in more than 20 years in an attempt to control inflation that has exacerbated the country’s economic crisis.
The latest price hike was a major blow, particularly to the South Asian country’s poor and vulnerable groups, who are grappling with their country’s worst economic crisis on record and are supplying essential necessities such as food, fuel, cooking gas and medicines. Struggles with acute lack of things.
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 loan assistance to help the country import fuel.
The central bank said it increased its interest rate on fixed deposits by 100 basis points to 14.50%. The move is intended to help attract more money into the banking sector. It also raised the interest rate on the permanent credit facility it charges commercial banks by 100 basis points to 15.50%.
The last time these prices were this high was in 2001.
The bank said it expected further monetary tightening to fully contain inflation, which rose to around 55% in June, while food inflation rose to over 80%.
The bank raised interest rates by 700 basis points in April, nearly doubling them, surprising economists as it struggled to contain inflation. Earlier, Fitch Solutions Country Risk and Industry Research had forecast that the interest rate on term deposits would rise to 16.50% and the interest rate on term loans to 17.50% by the end of the year.
“Our priority is to bring inflation down to at least reasonable levels as quickly as possible. The sooner the better,” said central bank governor Nandlal Veerasinghe.
Many central banks, most notably the US Federal Reserve, are raising interest rates to keep inflation from spiraling out of control. But Sri Lanka faces problems on a different scale.
“What the central bank has done is a step in the right direction, but it is very little given the high inflation rate, currently 55 percent, which will exceed 80 to 100 percent in the next two to three months.” WA Wijewardene, economist and former Deputy Governor of the Central Bank of Sri Lanka, said.
The prices of essential goods have tripled in the last few months and most people are struggling to meet their basic needs. Almost 70% of Sri Lankan households surveyed by UNICEF in May said they were cutting back on food consumption. Many families depend on government rice donations and charitable donations.
Sri Lanka’s economy is expected to contract by 1.6% yoy in the first quarter of the year, according to the central bank. Fuel and energy shortages continued to cripple economic activity in April-June.
The central bank said in a statement that although the economy has already slowed, a rate hike will help lower expectations of another price hike, which will help bring inflation down to the 6% to 7% target. Will get
Due to acute fuel and electricity shortages, Sri Lanka has closed schools for weeks while the government has asked civil servants other than those in essential services to work from home.
This week there have been power outages for three hours a day.
Fed up with dwindling foreign exchange reserves, Sri Lanka has suspended repayments on about $7 billion worth of foreign loans that were due this year.
The country is negotiating a bailout package with the International Monetary Fund, but Prime Minister Wickremesinghe said this week the negotiations are proving complicated and difficult as Sri Lanka is effectively bankrupt.
The economic slowdown has sparked a political crisis with widespread anti-government protests across the country. Protesters have blocked main roads demanding petrol and fuel, and TV channels have shown people struggling over limited supplies in some areas.
In the capital, Colombo, demonstrators have been occupying the entrance to the presidential office for more than two months, demanding the resignation of President Gotabaya Rajapaksa. They accuse him and his powerful family, which includes several siblings, most recently in top government positions, of perpetuating the crisis through corruption and mismanagement.