Sri Lanka raises rate, slows lending Saturday, 04 February 2012 00:10

COLOMBO: Sri Lanka’s central bank yesterday raised its key interest rate for the first time in five years and asked commercial banks to reduce lending in the face of a trade deficit.

The Central Bank of Sri Lanka hiked its benchmark lending rate by 50 basis points to 9.0 percent, the first rise since February 2007 when the rate was upped to 12.0 percent from 11.50 percent.

The bank also asked commercial banks to rein in lending, arguing that much of it financed the country’s surging import bill, owing to higher oil costs and cheap credit that drew a flood of foreign-made vehicles into the country.

The IMF, which extended a $2.6bn bailout to Sri Lanka following a balance of payments crisis in 2009, said it welcomed Friday’s policy moves, but said the island needed to do more to “balance the economy.”

International Monetary Fund’s Brian Aitken, who led a team to assess the island’s economy, said Sri Lanka could not allow the huge trade deficit that was seen in 2011 to continue along with dwindling foreign reserves.

However, he said the problems faced by Sri Lanka which is emerging from nearly four decades of ethnic war, was not as “acute” as it was in 2009 when foreign reserves dipped below $1 billion. Government forces crushed Tamil separatists in May 2009 and the regime of President Mahinda Rajapaksa thereafter sought the IMF bailout.

“We don’t see the situation as that acute,” Aitken told reporters in Colombo at the end of their latest review of the island’s economy.

AFP

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