Crisis-hit Sri Lanka raises rates to curb inflation

Gulf Today Report

Sri Lanka's central bank hiked interest rates on Thursday in a bid to tame rampant inflation and discourage consumer spending as the country suffers a foreign currency shortage and teeters on the brink of default.

The island nation of around 22 million has seen shortages of food and fuel as well as electricity rationing, with rating agencies warning it might not be able to meet repayments on its debts. Inflation hit a record 12.1 percent last month.

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The island nation has reiterated its commitment to repaying the entire $4 billion owed to investors in the rest of 2022 but in the absence of incoming dollars some analysts believe the country could face its first-ever default.

People queue to buy Liquefied Petroleum Gas cylinders in Colombo on Wednesday. AFP

The Central Bank of Sri Lanka (CBSL) raised the standing deposit facility rate and the standing lending facility rate by 50 basis points (bps) each to 5.50% and 6.50%, respectively.

"Inflationary pressures on the domestic front continued to be fuelled by supply-side disruptions, upward adjustments to administered domestic prices," the bank said in a statement.

It said the economy grew 4.0 per cent last year, having suffered a record 3.6 per cent contraction in 2020.

Colombo insists it will honour it obligations on its $35 billon in external debt.