Sri Lanka to keep rates high to combat inflation, await IMF deal

SRI LANKA: Sri Lanka's central bank is expected to keep interest rates unchanged for a fourth straight meeting this week as the crisis-hit country strives to keep a cap on inflation while waiting for an International Monetary Fund (IMF) bailout.

The island's economy is estimated to have shrunk 9.2% last year as it struggled with the worst financial crisis to befall the country in over seven decades triggered by a severe shortage of foreign exchange reserves.

The Central Bank of Sri Lanka raised rates by a record 950 basis points last year. But, at its last policy meeting in January, the central bank held the standing deposit facility rate and standing lending facility rate unchanged at 14.50% and 15.50%, respectively. All sixteen analysts and economists polled by Reuters expected rates to be held for a fourth straight meeting on Friday as Sri Lanka holds out hope for IMF board level approval by March end. The meeting was initially scheduled for Thursday but was pushed back to the next day by the central bank without citing a reason.

Sri Lanka signed a preliminary agreement with the global lender last September for a $2.9 billion program but has to put its debt on a sustainable track before disbursements can begin. The government is waiting for financing assurances from China, its largest bilateral lender, after receiving support from India and Paris Club members earlier this year.

"The IMF program is necessary for market confidence and to manage risk premiums. Without it, we may see secondary market rates edge up," said Arumainyagam Visaahan, research analyst at Asha Securities. "Even with an IMF program the central bank will likely wait till debt restructuring is underway and inflation is lower before adjusting rates downwards."

Reducing rates could also spur imports and put more pressure on Sri Lanka's meager reserves which were at $2.1 billion at the end of January, analysts said. Sri Lanka will keep a close eye on public expenditure, prioritising essential expenses such as salary, pension and welfare payments as it awaits IMF support.

"It is very crucial for Sri Lanka to get IMF support," State Minister of Finance Shehan Semasinghe told Reuters this week. "As of now, since we have done our reforms, it is very much required for us ... people have been told we are doing these reforms to better the economy and give relief in the future, so they are expecting that process to start."

Sri Lanka raised electricity tariffs by 66% this month, the second adjustment in six months, as part of implementing cost reflective pricing needed to secure the IMF program. Inflation eased to 50.6% in February from 51.7% last month, official statistics showed on Tuesday, and forecasts by the central bank and analysts indicate inflation will hit single digits towards the end of this year.