Sri Lanka’s Central Bank raised it benchmark lending rate to 16.5 percent, the highest in 22 years, due to pressure from the International Monetary Fund, the banking regulator said.The Friday’s rate increase by 100 basis points for both the Standing Deposit facility Rate and the Standing Lending facility rate to 15.5 percent and 16.5 percent respectively.
The bank in a strongly worded statement made it clear that it did not agree with the IMF on raising interest rates, but agree just to ensure that the $2.9 billion bailout that is still under negotiations was not jeopardised by resisting a rate hike.
“There have been some differences between the CBSL and IMF staff on the inflation outlook.
“Given the necessity of fulfilling all the ‘prior actions’ in order to move forward with the finalisation of the IMF Extended Fund Facility (EFF -bailout) arrangement, the Monetary Board and the IMF staff reached consensus to raise the policy interest rates, in a smaller magnitude, compared to the adjustment, which was envisaged during the initial stage of negotiations.
“This decision demonstrates Sri Lanka’s commitment to the IMF-EFF arrangement, which has been pursued by the government in order to ensure stability in the economy on multiple fronts,” the bank said.
High interest rates have partly helped reduce pressure on the exchange rate.
With the cost of rupee borrowings increasing, exporters have been encashing their foreign exchange earnings to pay off expensive rupee debts.
The dollar liquidity in commercial banks has also increased since Monday following the World Banks’ private investment arm, the International Finance Corporation (IFC), loaning $400 million to three local banks to finance essential imports.The rupee has appreciated by nearly 6.5 percent against all major currencies since Monday.
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