Sri Lanka cuts interest rates after debt restructure

Cash-strapped Sri Lanka cut interest rates on Thursday, a week after announcing a major debt restructuring in line with an IMF bailout following an unprecedented economic crisis last year.

The Central Bank of Sri Lanka slashed the benchmark lending rate by two percentage points to 12 percent, after unveiling the overhaul that involved a 30 percent haircut for foreign bond holders.

The move also followed a sharp decline in inflation to 12 percent in June, down from 25.2 percent in May and a record high of 69.8 percent in September that was fuelled by soaring food prices.

It forecast inflation to fall to single figures by the end of the year.

The bank said it made the cut, the second since July 2020, “following a careful analysis of the current and expected developments, including the faster-than-envisaged disinflation process and benign inflation expectations”.

It cut rates 2.5 percentage points in June.

The bankrupt nation secured a four-year, $2.9 billion International Monetary Fund bailout in March, and received the first installment of $330 million in March.

Last year, Sri Lanka ran out of cash to pay for even the most essential imports, leading to shortages of food, fuel and medicines.

As the economic crisis worsened, the central bank began raising rates from early 2022 with a record seven-percentage-point hike in April last year, a week before the government defaulted on its $46 billion foreign debt.

Then-president Gotabaya Rajapaksa, who faced allegations of mismanagement, was forced to flee the country and resign in July 2022 after months of protests.(BSS)