Sri Lanka raises its rates dramatically and looks to India for a quick boost in tourism

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Sri Lanka’s central bank raised borrowing costs in an effort to rein in record prices, which have fueled Asia’s fastest inflation. It also hopes to attract Indian tourists in order to revitalize its battered tourism sector and replenish its depleted foreign exchange reserves.

On Thursday, the Central Bank of Sri Lanka increased its benchmark standing lending facility rate by 100 basis points to 15.5 percent. Six of seven economists polled by Bloomberg expected a hike ranging from 50 to 300 basis points, with one expecting 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 to rise at an all-time high in June, fueled by persistent shortages caused by rapidly depleting foreign exchange reserves. Prime Minister Ranil Wickremesinghe told parliament on Tuesday that inflation will reach 60% in the coming months due to rising commodity prices and a weakening currency.

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Prior to Thursday’s decision, the country’s central bank had raised interest rates by 850 basis points since the beginning of the year, despite the fact that the country’s economy contracted in the first quarter, signaling the start of a painful and long recession. Economic activity has also come to a halt as the bankrupt country has asked residents to stay at home until July 10 in order 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 remained stable at an estimated $1.9 billion at the end of June, including $1.5 billion in Chinese currency subject to usability conditions, it said.

The country also intends to attract Indian tourists in order to revitalize its battered tourism sector and replenish its depleted foreign exchange reserves.

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

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

The worst economic downturn since independence, combined with political upheaval, has harmed the country’s tourism industry, which has been a key driver of foreign currency inflows. Sri Lanka’s forex reserves have shrunk to a meager $1.89 billion in May, despite the fact that the country requires nearly $6 billion in the coming months to address shortages and support its currency.

To get through the crisis, the South Asian country is relying heavily on multilateral institutions such as the International Monetary Fund and friendly countries. So far, neighboring India has provided $3.5 billion in assistance in recent months.

The roadshows will take place in Chennai, Bangalore, Hyderabad, Mumbai, and New Delhi, according to Fernando, who added that the bankrupt country hopes to attract 1 million tourists by 2022. Before the Easter Sunday terror attacks, Sri Lanka had a peak of around 2.5 million tourists in 2018.

The government planned to secure more oil supplies by next week, including enough jet fuel to keep international airlines flying to the country, and Fernando hoped that this would prompt the UK government to reverse a recent travel advisory on Sri Lanka.

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