Sri Lanka has cut interest rates for the first time since the economic recovery from the crisis

Sri Lanka's economy is recovering

In April 2022, Sri Lanka declared its worst economic crisis since independence from Britain in 1948, sparking months of street protests that led to the ouster of then-President Gotabaya Rajapaksa.

Sri Lanka’s central bank cut policy interest rates by 250 basis points, saying it would curb high inflation and spur growth. It is the first time the island nation has done so since the „historic contraction” of its economy in 2022.

The Monetary Board of the Central Bank of Sri Lanka has reported that inflation is falling faster than expected.

Board meeting

The board meeting was held on Wednesday (May 31). They cut the central bank’s Standard Deposit Facility Rate (SDFR) and Standard Lending Facility Rate (SLFR) by 250 basis points to 13 percent and 14 percent, respectively.

„The Board has taken this decision to ease monetary conditions in line with faster-than-expected inflation, gradual easing of inflationary pressures and further encouragement of inflation expectations,” the central bank said.

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„The start of such demonetisation is expected to provide an impetus for the economy to recover from the historically tight activity seen in 2022, while easing pressures on financial markets,” it said in a statement.

Inflation is falling

Inflation is projected to moderate significantly in the coming period, reaching single digit levels earlier than expected, the report added. Inflation was reported at 25.2 percent in May, compared to 35.3 percent in April, the Government Statistics Office announced.

The value of the Sri Lankan rupee against the US dollar has fallen from 360 rupees to 295 rupees. Official reserves rose to USD 3 billion by the end of May.

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Debt-ridden Sri Lanka is still struggling to normalize its crisis-hit economy after announcing its first default in April last year, with inflation expected to drop to single digits.

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IMF motivation

The central bank said the economy has seen signs of recovery since the International Monetary Fund (IMF) bailout of US$3 billion in March. Inflows into the domestic foreign exchange market remain strong following the approval of the Enhanced Financial Facility (EFF) from the IMF.

Also, financial assistance from international development partners such as the Asian Development Bank (ADB) and the World Bank and progress in the debt restructuring process are expected to help the recovery.

India’s helping hand

This week, in the early days of the economic crisis, when the country was gripped with long queues for essential goods and fuel, India announced an extension of $1 billion in facilities for imports of essential goods that were granted in early 2022.

India extended loans to Sri Lanka at the height of the country’s economic crisis.

In line with India’s Neighborhood First policy, India provided around US$4 billion in multilateral aid to Sri Lanka last year through several lines of credit and monetary support.

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According to official statistics, Sri Lanka’s total debt is US$ 83.6 billion, of which external debt is US$ 42.6 billion and domestic debt is US$ 42 billion.

In April 2022, Sri Lanka announced its first debt default, the worst economic crisis since independence from Britain in 1948, fueled by a foreign exchange shortage that sparked public protests.

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Months of street protests led to the ouster of then-President Gotabaya Rajapaksa in mid-July. After refusing to tap the support of the global lender, Rajapakse opened IMF negotiations.

(with agency inputs)

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