Sri Lanka Raises Rates To Curb Consumer Spending

Fahad Shabbir (@FahadShabbir) Published July 28, 2016 | 10:26 PM

COLOMBO, (APP - UrduPoint / Pakistan Point News - 28th july, 2016) - Sri Lanka raised its key interest rate by 50 basis points Thursday, saying it was necessary to discourage excessive consumer spending and head off a balance of payments crisis. The Central Bank of Sri Lanka raised its benchmark lending rate from 8.0 percent to 8.5 percent, the second such increase in five months. The latest move comes nearly two months after Sri Lanka secured a $1.5 billion bailout from the International Monetary Fund to address the country's widening trade deficit and shore up foreign reserves. "The continued appetite for bank credit by the private sector in spite of the upward movement in market interest rates could create excessive demand and high inflation in the economy in the future," the bank warned in its monthly review. Sri Lanka faced an impending balance of payments crisis last year as the government, elected in January 2015, sought to implement election pledges of higher public sector salaries and lower fuel and utility prices and encourage imports.

It began drawing down the first instalment from the $1.5 billion IMF bailout in June. The Indian Ocean island of 21 million enjoyed blistering economic growth rates averaging more than 8.0 percent for two years after a prolonged civil war ended in 2009. But the pace of expansion has since slowed, falling to 4.8 percent in 2015, down from 4.9 in the previous year, according to official data.

In 2009, Sri Lanka received $2.6 billion from the IMF to boost its financial reserves, which dropped below $1 billion at the height of fighting between Tamil Tiger rebels and troops.