Sri Lankan Crisis
Sri Lanka's central bank has raised its interest rates in an effort to control inflation and relax its currency. This move is to secure a bailout package of $2.9bn from the International Monetary Fund (IMF) to help the country through its worst financial crisis since gaining independence from the United Kingdom in 1948. The country's economy has been hit by the financial crisis, with growth contracting by an estimated 9.2% last year and inflation that hit 50% in February. Sri Lanka has increased interest rates, taxes, and electricity prices, among other measures, which has generated protests from citizens who were already struggling to make ends meet. The IMF has asked Sri Lanka to fulfill all the "prior actions" in order to finalize the IMF Extended Fund Facility arrangement. Sri Lanka is seeking IMF approval under a special policy called Lending Into Official Arrears, which allows the lender to approve the program without formal prior financing assurances from China.. Central bank Governor P Nandalal Weerasinghe said that with the rate increase, all "prior actions" have been fulfilled, and he was hopeful that the IMF package would be approved within this month. Despite the increase in rates, the central bank expects market rates will continue to reduce, while, in terms of currency, the country will gradually move towards a market-driven exchange rate country.
https://www.aljazeera.com/opinions/2023/3/9/the-g20-could-help-fix-sri-lankas-debt-crisis-will-it-step
1 comment:
Tough times for Sri Lanka, especially when they have to deal with 50% inflation while the economy is also contracting instead of expanding, which is not really commonly seen as those two normally have an inverse relationship. I can see that the government is trying to use monetary policies (increase in rates) to tame down inflation but that also heavily affects the economy as well since businesses can not grow as fast.
At the end, you mentioned "despite an increase in rates, the central bank expects the market rates will reduce". This part confuses me as I thought those two are the same thing? And how do they deal with inflation if rates are reduced?
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