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Sri Lanka vowed to soon restore a flexible exchange-rate regime after unexpectedly raising its benchmark interest rate as the troubled nation looks to secure a $2.9 billion International Monetary Fund (IMF) bailout to steady its economy.
“Sri Lanka’s rupee will be fully market-driven from next week,†Governor Nandalal Weerasinghe said at a press briefing after the Central Bank of Sri Lanka increased the standing lending facility rate by 100 basis points to 16.5%, the highest since August 2001. All eight economists in a Bloomberg survey expected the authority to extend a pause.
The twin moves reflect the nation’s commitment to clinch the IMF loan that’s counted on to unlock more funding, shore up foreign-currency reserves, ease supply shortages and help revive the $81 billion economy in recession.
In the past months, Sri Lanka has increased taxes and cut energy subsidies to meet the fund’s conditions, although such steps could also rekindle inflation that has come off from a peak of almost 70%.
“There have been some differences between the CBSL and IMF staff on the inflation outlook,†the central bank said in a statement announcing the rate hike. The authority had stood pat since August to allow previous tightening to damp demand in the economy.
But the IMF was of the view that more action was needed, the central bank said. “Given the necessity of fulfilling all the ‘prior actions’ in order to move forward with the finalisation of the IMF Extended Fund Facility arrangement,†CBSL said it “reached a consensus†with the lender to increase by a quantum that was smaller than originally discussed.
The rate increase shows the central bank’s “commitment to reduce inflation more quickly and firmly towards the single-digit target,†senior mission chief Peter Breuer and mission chief Masahiro Nozaki said in an emailed statement. “Durable disinflation would help boost market confidence, reduce excessive risk premia and ease the financing conditions for the corporates, especially the small and medium enterprises, which supports recovery.â€
The nation loosened its grip on the rupee for a third time this week, prompting a rally. The local currency extended gains to 8% this week, after it suffered a 45% slide in 2022.
While gains in consumer prices slowed after 950 basis points of CBSL interest-rate tightening last year, Sri Lanka continues to have Asia’s quickest inflation at above 50%.