Sri Lanka’s Central Bank has raised policy rates by 100 basis points to 16.50 percent effective from March 03 in order to fulfill its commitments made to the International Monetary Fund to obtain the approval of the executive board approval for economic reforms program and unlock the extended Fund Facility of US$ 2.9 Billion this month.
“There have been some differences between the CBSL and IMF staff on the inflation outlook,” the central bank governor Nandalal Weerasinghe said in monetary policy review media conference on Friday 03 in Colombo.
“Given the necessity of fulfilling all the ‘prior actions’ in order to move forward with the finalization of the IMF Extended Fund Facility (EFF) arrangement, the Monetary Board and the IMF staff reached consensus to raise the policy interest rates, in a smaller magnitude, compared to the adjustment, which was envisaged during the initial stage of negotiations he disclosed. .
The CBSL and the staff of the International Monetary Fund (IMF) have been engaging continuously in intensive negotiations on the monetary policy stance amidst extraordinarily high inflation and a high degree of uncertainty surrounding inflation projections and the near term outlook.
There have been some differences between the CBSL and IMF staff on the inflation outlook.
Given the necessity of fulfilling all the ‘prior actions’ in order to move forward with the finalization of the IMF Extended Fund Facility (EFF) arrangement, the Monetary Board and the IMF staff reached consensus to raise the policy interest rates, in a smaller magnitude.
This was compared to the adjustment, which was envisaged during the initial stage of negotiations.
This decision demonstrates Sri Lanka’s commitment to the IMF-EFF arrangement, which has been pursued by the Government in order to ensure stability in the economy on multiple fronts.
The finalization of the IMF-EFF arrangement is expected to benefit all stakeholders and bolster confidence, which would help restore stability in the economy on a sustained basis.
This will incentivise more foreign exchange flows in the period ahead that would aid the economy to overcome the prevailing economic crisis.
The Board was of the view that the economy has already traversed through the most difficult and unprecedented times with tremendous resilience and strongly believes that today’s decision would pave the way for a faster-than-expected deceleration of inflation.
The Monetary Board anticipates that this monetary policy action would help lower the spread between policy interest rates and high market interest rates.
This spread is expected to be further reduced with the reduction in market interest rates in the period ahead, especially the yields on government securities, reflecting the easing of risk premia as the debt restructuring process.
