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Crisis-hit Sri Lanka hikes interest rates in bid to tame inflation

(AFP)- Sri Lanka’s central bank hiked interest rates Thursday in a bid to tame rampant inflation and discourage consumer spending as the country suffers a foreign currency shortage and teeters on the brink of default.

The island nation of around 22 million has seen shortages of food and fuel as well as electricity rationing, with rating agencies warning it might not be able to meet repayments on its debts. Inflation hit a record 12.1 percent last month.

The central bank raised the benchmark deposit and lending rates by 50 basis points each to 5.5 percent and 6.5 percent respectively. The hike was the first since August.

It said in a statement that the higher borrowing costs would encourage savings and discourage consumption, thereby reducing demand for imports at a time when the country’s foreign reserves were under pressure.

The island’s tourism sector and worker remittances, the government’s main sources of income (and) have been battered by the pandemic.

“Inflationary pressures on the domestic front continued to be fuelled by supply-side disruptions, upward adjustments to administered domestic prices,” the bank said in a statement.

It said the economy grew 4.0 percent last year, having suffered a record 3.6 percent contraction in 2020.

Colombo insists it will honour it obligations on its $35 billon in external debt.

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