Sri Lanka Central bank Increases Interest Rates by 100bps

 Sri Lanka's central bank unexpectedly raised interest rates on Friday to help finalise an International Monetary Fund's Extended Fund Facility (EFF) arrangement, according to a statement.

The bank increased the standing deposit facility rate and the standing lending facility rate by 100 basis points each, to 15.50% and 16.50%, respectively.

The country is waiting for the IMF to approve a $2.9 billion bailout package.

Its economy has been strained by its worst financial crisis since its independence from Britain in 1948, with growth estimated to have contracted by 9.2 percent last year amid soaring inflation that reached 50% in February.

Sri Lanka's economic troubles began in 2019, when a severe economic crisis occurred as a result of rapidly increasing foreign debt, massive government budget deficits as a result of tax cuts, a food crisis caused by mandatory organic farming as well as a ban on chemical fertilisers, and a slew of other factors. The Sri Lankan government has officially declared the current economic crisis to be the country's worst in 73 years.

A food emergency was declared in August 2021. In parliament in June 2022, Prime Minister Ranil Wickremesinghe declared the collapse of the Sri Lankan economy. Sri Lanka defaulted on its $51 billion sovereign debt for the first time in its history, as well as experiencing double-digit inflation, a crippling energy crisis that resulted in 15-hour power outages, severe fuel shortages that forced the suspension of fuel to all non-essential vehicles, and other consequences.