Sri Lanka raises rates as economy risks collapsing

Sri Lanka’s central bank raised interest rates by one percentage point on Friday and urged the government to raise taxes as the country verges on economic collapse. The troubled South Asian island nation is mired in a severe currency crisis that has caused severe shortages of food, fuel, medicine and industrial raw materials, fueling inflation. Food inflation hit a record 25 percent in January, while overall price increases hit 16.8 percent, a fourth straight monthly record. Public transport has been at a standstill since Wednesday with no diesel for buses and much of the country of 21 million people affected by lengthy power cuts. On Thursday, President Gotabaya Rajapaksa sacked the energy and industry ministers after both criticized the government’s efforts to deal with the crisis. Another chief minister, Vasudeva Nanayakkara, expressed solidarity on Friday with the sacked ministers and said he would not attend cabinet meetings. The Central Bank of Sri Lanka raised benchmark rates for deposits and loans by 100 basis points each to 6.5 percent and 7.5 percent, respectively. The move follows a January decision to raise borrowing costs by 50 basis points. The increases “will cushion the possible build-up of underlying demand pressures in the economy, which, in turn, would help alleviate pressures in the external sector,” the bank said in a statement. He also urged the government to raise fuel prices and electricity tariffs immediately, as well as raise taxes to prop up government revenue. That came after a similar call from the International Monetary Fund. The bank also called on officials to suspend ongoing infrastructure projects, sell off state land and discourage “non-essential” imports. A sweeping import ban has been in place since March 2020 to shore up foreign exchange reserves after the pandemic wiped out the lucrative tourism sector, which previously earned some $4.5bn a year. In a statement following its annual review of Sri Lanka’s economy, the IMF warned the country on Thursday that its external debt was “unsustainable” and called for urgent action. Official data shows that Sri Lanka needs almost $7bn to pay off its foreign debt this year, but the country’s foreign reserves at the end of January were just $2.07bn, enough to finance a month’s imports. Read More Related World News Here | Asia News Today What do you think about this; Sri Lanka raises rates as economy risks collapsing | Newslodge Nigeria News Let’s hear your opinion in the comment below!