Sri Lanka hikes rates, urges govt on economic crisis

COLOMBO: Sri Lanka's central bank hiked interest rates one percentage point on Friday and urged the government to increase taxes as the country skirts on the edge of economic collapse.

The troubled South Asian island nation is in the grip of a severe foreign exchange crisis that has led to acute shortages of food, fuel, medicines and raw materials for industries -- sending inflation soaring to 25 percent in January.

Public transport has been crippled since Wednesday with no diesel for buses and large parts of the country of 21 million people have been hit by lengthy power cuts.

On Thursday, President Gotabaya Rajapaksa sacked the energy and industry ministers after they both criticised the government's efforts to deal with the crisis.

The Central Bank of Sri Lanka hiked the benchmark deposit and lending rates by 100 basis points each to 6.5 percent and 7.5 percent respectively. The move follows a January decision to lift borrowing costs by 50 basis points.

The increases "will dampen the possible build-up of underlying demand pressures on the economy, which would, in turn, help ease pressures in the external sector", the bank said in a statement.

It also urged the government to increase fuel prices and electricity tariffs immediately as well as raise taxes to shore up government revenue.

That came after a similar call by the International Monetary Fund.

In a statement following its annual review of Sri Lanka's economy, the IMF on Thursday warned the country that its foreign debt was "unsustainable" and called for urgent action.

The outbreak of the pandemic pushed the South Asian island's tourism sector -- a key foreign-exchange earner -- off a cliff, and the government in March 2020 imposed a broad import ban to shore up foreign currency.

The IMF noted that Sri Lanka's fast-dwindling foreign reserves were inadequate to service its current foreign debt of $51 billion.

Official data shows Sri Lanka needs nearly $7 billion to service its foreign debt this year, but the country's external reserves at the end of January were only $2.07 billion -- just enough to finance one month's imports.