World News | Sri Lanka cuts policy rates to lower inflation and boost recovery

COLOMBO (PTI) Sri Lanka’s central bank cut policy interest rates by 250 basis points on Thursday, the first cut since the island nation’s economy entered a “historic contraction” in 2022, saying it would reduce high inflation and provide momentum to economic growth.

The Monetary Board of the Central Bank of Sri Lanka decided to cut the policy rate by 250 basis points, saying that inflation fell faster than expected.

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The bank’s board met on Wednesday. They cut the central bank’s standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) by 250 basis points to 13.00% and 14.00%, respectively.

“The board’s decision was taken to ease monetary conditions in line with a faster-than-anticipated slowdown in inflation, dissipating inflationary pressures and further anchoring of inflation expectations,” the central bank said.

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“The start of such monetary easing is expected to provide the economy with the impetus to rebound from a historic contraction in activity in 2022, while easing stress in financial markets,” it said in a statement.

“Inflation is expected to decelerate significantly over the period ahead, reaching single-digit levels earlier than expected,” the statement added.

Inflation fell to 25.2% in May from 35.3% in April, the government statistics office announced.

The rupee has fallen to the 295 mark against the dollar from 360 in January.

Official reserves increased to more than $3 billion by the end of May.

Debt-ridden Sri Lanka is still trying to normalize its crisis-hit economy after announcing its first default on its debt last April, hoping inflation will drop to single digits.

The central bank said the economy had shown signs of recovery since the IMF bailout in March.

The International Monetary Fund provided a $3 billion bailout loan to Sri Lanka.

“Inflows to domestic FX market remain strong after International Monetary Fund (IMF) approves Extended Fund Facility (EFF)”.

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

This week, India announced an extension to 2022 of a $1 billion essential goods import facility granted early in the economic crisis, when tensions gripped the country and people lined up to buy essentials and fuel.

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

Last year, India provided about $4 billion in multi-pronged assistance to Sri Lanka through multiple lines of credit and monetary support under India’s “Neighborhood First” policy.

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

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

Months of street protests led to the ouster of then-president Gotabaya Rajapaksa in mid-July. Rajapaksa started talks with the IMF after refusing to seek support from global banks.

(This is an unedited and auto-generated story from a Syndicated News feed, the content body may not have been modified or edited by LatestLY staff)