Sri Lanka increases Rates for the First Time in Five Years
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- Created on Saturday, 04 February 2012 10:26
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Sri Lanka Central bank raised interest rates for the first time since 2007 to curb credit growth in the nation and ensure inflation stays low.
The Central Bank of Sri Lanka CBSL Thursday raised the reverse repurchase rate to 9 percent from 8.5 percent and the repurchase rate to 7.5 percent from 7 percent,
The Bank said that the consequent to the increased domestic economic activity, low interest rates, as well as the unexpectedly high energy prices in the international market, the total expenditure on imports increased substantially to US dollars 18.4 billion during the first eleven month of 2011 widening the trade deficit. This was in spite of earnings from exports increasing by 22.2 per cent to US dollars 9.6 billion during the period. Increased earnings from tourism, increased workers’ remittances, and other inflows to the services account helped cushion the impact on the current account deficit, while the Central Bank had to intervene by supplying foreign exchange, on a net basis, to mitigate the undue pressure on the domestic foreign exchange market.
"As a result, despite higher inflows of foreign direct investments and inflows to the Government, gross official reserves (excluding Asian Clearing Union balances) declined to US dollars 5.9 billion by end December 2011, representing the equivalent of 3.6 months of imports." the bank said in a statement
Meanwhile, credit granted by commercial banks to the private sector increased by 34.5 percent, year-on-year, in December 2011, substantially exceeding projections. Provisional estimates indicate that within the credit extended to the private sector by commercial banks, trade related credit and credit driven by import related items such as motor vehicles and consumer durables increased significantly. Import related credit increased by over 34 per cent during 2011, while the increase in credit for export activity was only around 8 per cent during the year. Pawning also displayed a significant increase in 2011. In addition, credit granted to the Government and public corporations by commercial banks increased considerably, and in particular, a higher petroleum import bill and the inadequate adjustment to domestic petroleum prices led to increased borrowings by the Ceylon Petroleum Corporation (CPC).
