COLOMBO: Sri Lanka’s central bank raised interest rates on Thursday in an effort to curb high inflation and discourage consumer spending as the country suffers from a foreign currency crisis and is on the verge of default.
The island country of almost 22 million people has experienced food and fuel shortages, as well as energy restrictions, with rating agencies warning that it may be unable to satisfy debt obligations. Last month, inflation reached a new high of 12.1%.
The central bank increased the benchmark deposit and lending rates by 50 basis points each, to 5.5% and 6.50%, respectively. It was the first hike since August.
The higher borrowing rates, it claimed in a statement, would promote savings and discourage spending, lowering demand for imports at a time when the country’s foreign reserves were under strain.
The pandemic has wreaked havoc on the island’s tourism industry and worker remittances, which are the government’s primary sources of revenue.
“On the domestic front, inflationary pressures continued to be driven by supply-side disruptions, upward adjustments to administered domestic prices,” the bank said in a statement.
According to the report, the GDP increased by 4% last year after contracting by a record 3.6% in 2020.
Colombo insists on meeting its obligations under its $35 billion external debt.
