By Uditha Jayasinghe
COLOMBO, March 4 (Reuters) - Sri Lanka's decision to
raise interest rates shows the crisis-hit country's commitment
to reducing inflation quickly towards single-digit levels, the
International Monetary Fund (IMF) said on Saturday.
In a surprise move, the South Asia nation's central bank
raised rates by 100 basis points on Friday to battle inflation,
which is at 50.6%. The government is awaiting approval of a $2.9
billion IMF bailout package as it endures its worst financial
crisis since independence from Britain in 1948.
"Sri Lanka’s inflation is declining but remains at a very
high level, which has been disproportionally hurting the poor,
the IMF said in a statement. "Upside inflation risks could
reverse the trend and lead to persistently high inflation which
is extremely costly to the economy."
Durable disinflation would help boost market confidence in
the island nation, reduce excessive risk premia of government
securities and ease the financing conditions for companies,
which supports recovery, the global lender said.
The central bank raised its standing deposit facility rate
to 15.50% and its standing lending facility rate to 16.50%, and
said it would relax its currency band to move towards a
market-determined exchange rate as it seeks to secure the
bailout.
The bank raised rates by 950 bps in the first half of last
year to contain the country's financial crisis. But Friday's
rate hike, the first since July, was largely unexpected by
analysts and economists.
The IMF also backed tax hikes and power tariff increases
implemented this year, which have drawn protests from public
workers who have demanded a fairer taxation policy from the
government.
Sri Lanka is pushing for finalisation of a four-year
Extended Fund Facility and is expecting IMF board level approval
this month, its central bank chief said on Friday.
(Reporting by Uditha Jayasinghe; Editing by William Mallard)
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