COLOMBO, Sri Lanka (AP) — The Central Bank of Sri Lanka cut interest rates on Thursday for the first time since the island nation declared bankruptcy, after tight fiscal controls, improved foreign exchange earnings and l Aid from an International Monetary Fund program caused inflation to slow faster than expected.
The Central Bank said in a statement that interest rates on loans and deposits had been cut by 250 basis points to 14% and 13%.
The hope is that the rate cut “provides momentum for the economy to rebound from the historic contraction in activity seen in 2022, while easing pressures on financial markets,” the statement 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-digit territory in the third quarter.
Sri Lanka declared bankruptcy in April 2022 and announced that it was suspending repayment of its external debt. It struck a deal with the IMF in March for a nearly $3 billion four-year bailout program and began negotiations with its creditors on debt restructuring.
Foreign capital inflows have been robust since the IMF deal, helped by import controls, rising tourism revenues and worker remittances, allowing the Central Bank to bolster its reserves, according to the communicated.
The reduction in interest rates should allow the private sector to have better access to credit facilities – a key demand from small and medium-sized businesses which have cut jobs or closed during the unprecedented crisis.
“The economy is expected to rebound gradually from the end of 2023, supported by easing monetary conditions, improving business and investor sentiment as well as the realization of improved foreign exchange inflows, the recovery stronger. of the tourism sector and the implementation of measures promoting growth. policy measures,” the Central Bank said.
Sri Lanka’s economic collapse triggered by the COVID-19 pandemic cutting off its tourism and export earnings has turned into a full-fledged crisis due to the government’s insistence on spending its scarce foreign exchange reserves on support the Sri Lankan rupee. The crisis has caused a shortage of essentials like food, medicine, cooking gas and fuel. Angry street protests forced then-president Gotabaya Rajapaksa to flee the country and resign.