Crisis-hit Lanka hikes rates by record 7%

Cash-strapped Sri Lanka’s central bank hiked interest rates by a record 700 basis points Friday, in a bid to support the tumbling rupee as the country faces a dire economic crisis.

The Central Bank of Sri Lanka said its benchmark lending rate was raised to 14.5 per cent to “stabilise the exchange rate” after the rupee depreciated over 35 per cent in a month.

The deposit rate was also increased by seven percentage points to 13.5 per cent amid reports that Sri Lanka’s rupee was the world’s worst performer, overtaking the Russian ruble.

The central bank said the shock-treatment rate hike was due to its belief that the embattled island’s inflation, which is already at record high levels, could get worse.

The Colombo Consumer Price Index rose 18.7 per cent in March while food inflation was at over 25 per cent, with private analysts placing inflation at over 50 per cent in March.

International rating agencies have downgraded Sri Lanka as fears grew that it could default on its $51 billion external debt as foreign reserves fell below $2.0 billion at the end of March.

As economic hardships brought on by shortages of food, fuel and electricity led to widespread anti-government protests across the country, there were also calls for President Gotabaya Rajapaksa to resign.

The government has announced it will seek an IMF bailout, but talks are yet to begin.

No-confidence motion

Sri Lanka’s main opposition party on Friday asked the government to resolve an economic crisis or face a no-confidence motion, as leaders of businesses from garments to tea and other industries warned that exports could fall up to 30 per cent this year.

The heavily indebted country has little money left to pay for imports, which has led to crippling shortages of fuel, power, food, and increasingly, medicine.

Street protests have gone on nearly non-stop for more than a month, despite a five-day state of emergency and a two-day curfew.

President Gotabaya Rajapaksa is running his administration with only a handful of ministers after his entire cabinet resigned this week, while the opposition and even some coalition partners rejected calls for a unity government to deal with the worst crisis in decades.

At least 41 lawmakers have walked out of the ruling coalition to become independents, though the government says it still has a majority in parliament.

“The government needs to address the financial crisis and work to improve governance, or we will move a no-confidence motion,” Sajith Premadasa, leader of Samagi Jana Balawegaya opposition group, said in parliament.

“It is imperative that Sri Lanka must avoid a disorderly debt default. The government must work to suspend debt and appoint financial advisers to start off the process of restructuring debt.”

Parliament proceedings were suspended twice in the morning as rivals heckled each other, with two members temporarily removed from the chamber on the orders of the speaker.

Nearly two dozen associations, representing industries that collectively employ a fifth of the country’s 22 million people, together urged the government to quickly seek financial help from the International Monetary Fund (IMF), the World Bank and the Asian Development Bank (ADB).

“We need a solution within weeks or the country will fall off the precipice,” Rohan Masakorala, director-general of the Sri Lanka Association of Manufacturers And Exporters of Rubber Products, told a news conference.

“Our estimate is that both merchandise and service exports could drop 20-30 per cent this year due to a dollar shortage, higher freight costs and power cuts.”