(Bloomberg) – Sri Lanka’s central bank has raised borrowing costs by an unprecedented 700 basis points amid economic and political unrest that has sparked street protests and left President Gotabaya Rajapaksa with a minority in parliament .
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The Central Bank of Sri Lanka raised the rate on the standing lending facility to 14.5% from 7.5%, it said in a statement on Friday. That’s well above the median estimate of 8.5% in a Bloomberg survey of economists.
“I am here to implement an independent policy. There is no political interference in my regime, I have made that very clear to the authorities,” new governor Nandalal Weerasinghe said in a later press briefing. “I have the full support and blessing of the government, the opposition parties and, above all, the general public.”
Weerasinghe’s emphasis on ‘credible policy’ comes as Sri Lanka seeks to start virtual talks with the International Monetary Fund next week to help it honor $8.6 billion in debt payments due this year. On Wednesday, the South Asian nation announced a three-member advisory group that will help manage the crisis and engage with outside lenders.
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“It’s a big increase and we expected it to be split into two political meetings. However, it’s the right move under the current circumstances,” said Lakshini Fernando, an economist at Asia Securities Ltd. in Colombo. “This bold move brings us one step closer to negotiations with the IMF as it shows the country’s determination to act.”
It’s too early to tell about the billion-dollar bonds maturing in July, but that rating and other payments depend on the planned debt restructuring, Weerasinghe said. He added that Sri Lanka had no intention of defaulting.
Sri Lankan dollar bonds sank, leading to losses among emerging markets. The 2022 note was listed at 55.3 cents to the dollar, the lowest since May 2020, according to data compiled by Bloomberg. Bonds due in 2028 were listed at 38.6 cents, the lowest since the paper was issued in 2018.
“Our base-case scenario remains for a potential IMF-funded program, with the authorities likely beginning a consent solicitation to delay the July deadline into the next four months as a potential first step to actively engage with the Fund to ensure debt sustainability, while avoiding a difficult crisis. default,” JPMorgan strategists Milo Gunasinghe and Trang Nguyen wrote in a note on Friday, ahead of central bank comments. “However, we recognize that the risks of a disorderly outcome have also increased.”
The central bank’s decision — which brings cumulative hikes to 900 basis points from the pandemic-era low — is aimed at curbing demand pressures and preserving the dollars needed to import food and fuel. The move will also provide support for its currency which has fallen over 57% since its devaluation.
Consumer prices accelerated to around 19% last month, the highest rate in Asia. Price pressures could reach 25% the following month and so we had to put the brakes on, Weerasinghe said.
Soaring costs have fueled street protests calling for the president’s ouster. The Sri Lankan opposition plans to table a motion soon to abolish Rajapaksa’s sweeping executive powers which lawmakers and critics say have contributed to economic mismanagement.
More than 40 lawmakers this week abandoned his coalition and left him in the minority. MPs on both sides of the aisle have been reluctant to work with a stripped caretaker government, hastily formed after the entire cabinet resigned earlier in the week. Their main concern was that Rajapaksa would overrule cabinet decisions.
Rajapaksa used his powers on Wednesday to set up a new panel of tax experts and bureaucrats to advise him on the debt crisis and economic issues. Thursday, he had sworn Weerasinghe, career central banker, at the head of the monetary authority.
The central bank also raised the permanent deposit facility rate on Friday to 13.5% from 6.5%.
Stock markets are closed next week in Colombo for public holidays. They had previously traded shortened sessions due to blackouts of up to 13 hours a day due to fuel shortages.
“The situation could get even worse in the next few weeks or months, but a turnaround will happen at some point,” Weerasinghe said. “But the necessary condition for it to turn around is not only economic policies, but also two key elements – political stability and social stability – and there we have some challenges at this stage.”
(Updates with comments on bond redemption)
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