COLOMBO – Sri Lanka’s central bank raised interest rates for the first time in nearly three years today as the rupee hit a record low amid a crippling foreign exchange shortage.
With the country of 21 million already facing shortages of imported cooking gas and sugar because of the lack of United States dollars, the Central Bank of Sri Lanka increased its deposit and lending rates by 50 basis points to 5.0% and 6.0%, respectively.
The bank said the move is to counter “imbalances” as the rupee falls against the dollar, “and to pre-empt the build-up of any excessive inflationary pressures”.
The rupee fell to 216.55 to the dollar – its lowest-ever level – despite the lender urging currency traders not to allow the local note to fall below 202.
The government reduced rates after the coronavirus pandemic hit last year in hopes of bolstering the economy.
But, Sri Lanka still recorded its worst recession in decades, with the economy shrinking 3.6% as tourist arrivals collapsed, and with it, foreign currency receipts.
Sri Lanka’s foreign reserves fell to US$2.8 billion (RM11.87 billion) at end-July from US$7.5 billion in November 2019 when the government took office.
The rupee has lost nearly 20% of its value against the dollar in that time, according to data from private banks.
Faced with currency shortages, the government has banned a wide range of imports, including vehicles and industrial raw materials and machinery, since March last year.
With supermarkets rationing staples like sugar and milk powder, importers said they cannot get dollars at official exchange rates and have to pay black-market prices.
Energy Minister Udaya Gammanpila appealed to motorists this week to use fuel sparingly so that the country can use its foreign exchange to buy essential medicines and vaccines.
Another top official warned that fuel rationing may be introduced by year-end unless consumption is reduced.
Last month, Moody’s placed Sri Lanka under watch for a downgrade on persistent fears that the island could default on its foreign debt.
Sri Lanka’s annual foreign debt servicing is estimated at US$4 billion to US$5 billion over the next four to five years, said the ratings agency.
The country has arranged a US$250 million loan from Bangladesh, and similar cash injections from India, China and South Korea. – AFP, August 19, 2021
