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Crisis-hit Sri Lanka hikes rates as protests spiral

COLOMBO (AFP) – Cash-strapped Sri Lanka’s central bank hiked interest rates by a record 700 basis points on Friday as police fired tear gas at hundreds of students protesting over the economic crisis.

Severe shortages of food and fuel, alongside lengthy electricity blackouts, have led to weeks of widespread anti-government demonstrations – with calls for President Gotabaya Rajapaksa to resign.

The latest protests saw students try to march on Friday to the National Parliament, and police used water cannons to disburse the angry crowds.

Monks, who had largely rallied the Sinhala-Buddhist majority to elect Rajapaksa at the November 2019 polls, were also seen joining demonstrations in the capital Colombo, where some defiantly stood opposite police wearing gas masks and holding riot shields.

Demonstrators nationwide carried placards saying “Gota go home”, demanding Rajapaksa and his administration step down over the country’s worst economic crisis since independence in 1948.

Riot police attempt to block protesters during a rally near the prime minister’s house in Colombo. PHOTO: AFP

The Central Bank of Sri Lanka said its benchmark lending rate had been raised to 14.5 per cent to “stabilise the exchange rate” after the rupee tumbled over 35 per cent in a month. The rate for deposits was also increased by seven percentage points to 13.5 per cent as reports said Sri Lanka’s rupee was the worst-performing currency in the world, edging out the Russian ruble.

The bank’s newly appointed governor, Nandalal Weerasinghe, said attempts to control foreign exchange markets and keep interest rates artificially low in the past year had contributed to the unprecedented economic chaos.

“We are now in damage control mode,” Weerasinghe said at his first press conference since replacing Ajith Cabraal, who was virtually forced out on Monday with the country facing bankruptcy.

“We would not have had to make such a sharp increase if rates had been raised incrementally over a period of time,” Weerasinghe said, vowing to relax exchange controls introduced by his predecessor.

The bank said the shock-treatment rate hike was due to its belief that the embattled island’s inflation, already at record levels, could get worse.

The Colombo Consumer Price Index rose 18.7 per cent in March while food inflation topped 25 per cent, but private analysts placed inflation at over 50 per cent in the month.

International rating agencies have downgraded Sri Lanka as fears grow it could default on its USD51-billion external debt.

This week, Rajapaksa appointed a panel of experts to organise a restructuring of foreign debt.

His government is preparing for bailout negotiations with the International Monetary Fund (IMF), and Finance Ministry officials said the panel will prepare a programme for sovereign bond-holders and other creditors to take a haircut.

“What Sri Lanka is keen to do is avoid a hard default,” a source from the ministry who requested anonymity told AFP.

“It will be a negotiated restructuring of the debt with the help of the IMF.”