Sri Lanka cuts interest rates for first time since bankruptcy as economy shows signs of recovery

COLOMBO, Sri Lanka (AP) — Sri Lanka’s central bank cut interest rates Thursday for the first time since the island nation declared bankruptcy.After tight financial controls, improved foreign exchange earnings and assistance from the International Monetary Fund (IMF) eased inflation faster than expected.

The central bank said in a statement that interest rates on loans and deposits have been cut by 250 basis points to 14% and 13%.

The hope is that cutting rates will „provide an impetus for the economy to recover from the historic contractionary activity seen in 2022.”while easing pressures on financial markets,” the report said.

According to the central bank, headline inflation stood at 35.3% in April, eased to 25.2% in May and is expected to reach single digits in the third quarter.

Sri Lanka declared bankruptcy in April 2022 and said it would stop repaying its foreign debt. It reached an agreement with the IMF in March for a nearly $3 billion bailout package It has been in talks with its creditors for a debt restructuring for more than four years.

Foreign currency inflows have been strong since an accord with the IMF allowed the central bank to bolster its reserves with the help of import controls, tourism and employee remittances, the statement said.

The interest rate cut is expected to allow the private sector better access to credit facilities – a key demand of small and medium enterprises that have cut jobs or closed during the unprecedented crisis.

„The economy is expected to recover gradually from late 2023, easing monetary conditions, improvement in business and investor sentiments and realization of enhanced foreign exchange inflows, enabling rapid recovery and growth of the tourism sector. Policy measures,” the central bank said.

Sri Lanka’s economic collapse caused by the COVID-19 pandemic has turned into a full-blown crisis, cutting off its tourism and export earnings. By insisting that the government spend its scarce foreign reserves to prop up the Sri Lankan rupee. The crisis resulted in shortage of essential commodities like food, medicine, cooking gas and fuel. Angry street protests forced then President Gotabaya Rajapaksa to flee the country and resign.