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Business Maverick

Sri Lanka hikes rates steeply, looks to India for quick tourist boost

Sri Lanka hikes rates steeply, looks to India for quick tourist boost
People wait to buy kerosene at a fuel station amid a fuel shortage in Colombo, Sri Lanka, 18 May 2022. Protests have been rocking the country for weeks, calling for the resignation of the president over the alleged failure to address the worsening current economic crisis. Sri Lanka faces its worst economic crisis in decades due to the lack of foreign exchange, resulting in severe shortages in food, fuel, medicine, and imported goods. (Photo: EPA-EFE/CHAMILA KARUNARATHNE)

Sri Lanka’s central bank has raised borrowing costs in a bid to rein in record prices that have stoked Asia’s fastest inflation. It is also hoping to draw Indian tourists to revive its battered tourism sector and shore up its depleted foreign exchange reserves. 

The Central Bank of Sri Lanka raised its benchmark standing lending facility rate by 100 basis points to 15.5% on Thursday. Six out of seven economists in a Bloomberg survey expected a hike ranging from 50 basis points to 300 basis points, while one expected a hold. 

“The board was of the view that a further monetary policy tightening would be necessary to contain any build-up of adverse inflation expectations,” the central bank said in a statement. 

The decision comes as prices continued their record rise in June driven by persistent shortages due to fast depleting foreign exchange reserves. Prime Minister Ranil Wickremesinghe told parliament Tuesday, that the inflation rate will hit 60% in the coming months amid rising commodity prices and a declining currency.

Prior to Thursday’s decision, the country’s central bank had raised interest rates by 850 basis points since the beginning of the year, even as its economy contracted in the first quarter, marking the beginning of a painful and long recession for the country. Economic activity has also come to a grinding halt as the bankrupt nation asked residents to stay home until July 10 to conserve fuel. 

“Domestic economic activity during the second quarter of 2022 is expected to have been severely affected by the continued supply side disruptions, primarily due to the shortages of power and energy,” the central bank said. 

The country’s forex stockpile held steady at an estimated $1.9 billion at the end of June, including $1.5 billion worth of Chinese currency which is subject to conditionalities on usability, it said.

The country is also planning to tap Indian tourists to revive its battered tourism sector and shore up its depleted foreign exchange reserves. 

Authorities will hold roadshows starting next month in five Indian cities to attract travellers seeking “wellness, leisure, and Ramayana-trail,” tours, corporate functions and destination weddings, said Harin Fernando, the South Asian island’s tourism minister. Ramayana is the mythological life story of the Hindu god Ram. 

“We believe that Indian tourists will be very important for us in the short term,” he said in a virtual conference with reporters on Wednesday.

The worst economic meltdown since independence, coupled with political turmoil, has hurt the nation’s tourism sector, that’s been a key driver of foreign currency inflows. Sri Lanka’s forex pile has dwindled to a meager $1.89 billion in May even as it needs nearly $6 billion in the next few months to tackle shortages and support its currency. 

The South Asian nation is banking heavily on multilateral institutions, including the International Monetary Fund, and friendly countries, for aid to tide over the crisis. Neighboring India, so far, has extended $3.5 billion of support in the last few months. 

Chennai, Bangalore, Hyderabad, Mumbai, and New Delhi have been picked for the roadshows, Fernando said, adding that the bankrupt nation hopes to attract about 1 million tourists in 2022. Sri Lanka welcomed a peak of around 2.5 million tourists in 2018 before the Easter Sunday terror attacks dried up arrivals. 

The government was scheduled to secure more oil supplies by next week, including adequate jet fuel to ensure international airlines continue to fly to the nation, and hoped that it may also prompt the UK government to reverse a recent travel advisory on Sri Lanka, Fernando said. BM

 

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