Sri Lanka to hold rates as inflation slows slightly, focus on IMF bailout

Business district in Colombo Sri Lanka

A general view of the business district in Colombo, Sri Lanka, September 10, 2020. Picture taken through a glass window. (Reuters / Dinuka Liyanawatte)

Sri Lanka’s central bank is expected to keep rates steady as inflation shows signs of easing and as authorities focus on discussions to secure a $2.9 billion International Monetary Fund (IMF) bailout to stabilise its crisis-hit economy.

Thirteen out of 15 economists and analysts polled by Reuters forecast rates to remain unchanged at Thursday’s policy announcement, as the Central Bank of Sri Lanka (CBSL) waits for the effects of its earlier hikes to filter through to prices and the broader economy.

The CBSL held both the standing deposit facility rate (LKSDFR=ECI) and standing lending facility rate (LKSLFR=ECI) stand at 14.50% and 15.50%, respectively, in its last policy announcement on October 6.

“Things have stabilised to some extent on the monetary side, but not the economy as a whole. If global economic stress starts to ease and if Sri Lanka secures an IMF deal before next March we can expect rate cuts in mid-2023,” said Visaahan Arumainayagam, analyst for Colombo-based brokering firm Asha Securities.

The CBSL has raised rates by a record 950 basis points this year to battle runaway inflation which has piled pressure on an economy grappling with its worst crisis since independence from Britain in 1948.

After hitting an annual peak of 68.9% in September with food inflation climbing to 93.7%, consumer inflation moderated slightly to 66% in October.

Sri Lanka’s economy shrank 8.4% in the quarter through June from a year ago in one of the steepest declines seen in a three-month period, amid fertilizer and fuel shortages. The central bank is forecasting gross domestic product to contract 8.7% in 2022, one of the worst full year slumps on record.

An acute dollar shortage has left Sri Lanka struggling to pay for essential imports of food, fuel and medicine, with all eyes on the IMF bailout to try and stabilise the nation’s perilous debt situation and finances.

“The key challenges will be getting the debt restructuring plan through, getting an IMF programme underway, securing bilateral funding support and addressing the structural issues that led to a fiscal and current account deficit,” said Rehana Thowfeek, economist for think tank Advocata Research.

“Sri Lanka is in need of some deep economic reforms which are politically challenging, overcoming this will be difficult.”

Organisation SDFR On Nov. 24 SLFR On Nov. 24
CT CLSA 14.50% 15.50%
Acuity 14.50% 15.50%
Advocata Institute 14.50% 15.50%
CAL Group 14.50% 15.50%
Lanka Securities 14.50% 15.50%
First Capital 14.50% 15.50%
Asha Securities 14.50% 15.50%
Capital Economics 14.50% 15.50%
NDB Investment Bank 14.50% 15.50%
University of Colombo 14.50% 15.50%
JB Securities 14.50% 15.50%
Frontier Research 14.50% 15.50%
CSE 13.50% 14.50%
Standard Chartered 16.50%
HSBC 14.50% 15.50%