By Rajiesh Seetharam
The Central Bank of Sri Lanka (CBSL), decided to increase policy rates by 100 basis points with view of controlling rising inflation. Accordingly, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank would be 14.50 per cent and 15.50 per cent respectively.
Earlier it was reported that year-on-year Headline inflation as measured by Colombo Consumer Price Index increased to 54.6% in June 2022 from 39.1% in May 2022. The food inflation was at 80%.
Speaking at a press conference, post-July monetary review, CBSL Governor Dr. Nandalal Weerasinghe stated, “Poor people in the society are going to be hit hard due to the rising inflation. Providing a safety net to the vulnerable segment of society was one of the IMF recommendations. Inflation may go up to 70%. CBSL first priority is to bring down inflation as soon as possible. If inflation goes up to 100%, it is called hyper inflation. At hyperinflation, all businesses including SME’s would not be able to function. The Monetary board has raised rates to curb inflation.”
When questioned regarding the requests from tourism sector to extend the moratoriums by another six months, the CBSL Governor replied “The moratoriums given to all sectors, including tourism sector in the post-Easter Sunday attacks and during Covid-19 have come to end. We cannot direct banks to further extend moratoriums. To relieve pain of inflation and other economic and political unrests, CBSL has advised banks to be flexible with businesses, consider it case by case basis, and provide solutions accordingly.”
The CBSL Governor stated that the trade deficit narrowed significantly in May 2022, over the corresponding period of last year due to previous actions taken by CBSL like raising policy rates and measures taken to reduce black market premiums in foreign exchange markets.
He noted, “As a result of curbing imports on DA basis/ using open accounts, we saw black market foreign exchange rates narrowing official exchange rates. However, certain importers and black market foreign exchange dealers have lobbied the Ministry of Finance stating that they import essential items on open account, and got exemptions for certain items to be imported on open accounts. As a result black market premiums are going up again. CBSL is against these exemptions. These open account imports are misused to import certain unessential imports too.”
The Sri Lankan economy contracted to negative 1.6% in the first quarter 2022, and is expected to suffer major contraction this year. Tourism and remittances haven’t picked up to the level of expectations, the CBSL Governor noted.