Sri Lanka’s central bank chief imposed more capital controls and threatened to resign if politicians fail to return stability to the nation in the grip of its worst economic crisis since independence.
“I took on this responsibility with expectations that political stability will be established,” Governor Nandalal Weerasinghe said at a briefing in Colombo Wednesday. “It’s been more than a month with no progress. I do not wish to continue in this post if political stability is not achieved.”
The call follows days of political violence, with clashes between pro- and anti-government groups pushing the prime minister to resign and dissolving his cabinet. A government is essential to agree a loan from the International Monetary Fund or win crucial bridge loans from countries willing to bail out Sri Lanka.
The IMF in a statement overnight expressed concerns about the violence, adding that it continues “technical level” discussions in order to be ready for policy talks once a new Sri Lankan government is formed. If Weerasinghe steps down, there’s a risk even the technical talks may slow.
Apart from the IMF and debt-restructuring talks, Sri Lanka needs a finance minister to take essential steps including raising taxes and energy prices, Weerasinghe said. If revenues fail to grow, the central bank will have to print more money, he warned.
The Central Bank of Sri Lanka has raised interest rates by 850 basis points this year alone to fight inflation that has accelerated to a record almost 30% in April. Boosting money supply would only worsen price pressures and accelerate outflows in a nation facing a dire shortage of dollars.
To curb black market transactions, the monetary authority plans to issue guidance to banks on movement of the exchange rate, including a daily trading band for the rupee-dollar trade, Weerasinghe said. Operating instructions will be issued on Thursday.
“Seems like an administrative peg which will keep getting revised on a daily basis,” said Saurav Anand, economist for South Asia at Standard Chartered Plc. “So unlike the earlier regime where value was fixed at 203; this time it would be revised on a daily basis.”
The rupee, which has lost almost half its value this year, fell 0.1% to 365.45 per dollar on Wednesday. Sri Lanka’s 7.55% 2030 bond dropped to a record low to trade at 38.5 cents on the dollar while Weerasinghe spoke.
Weerasinghe’s briefing comes amid ongoing drama in the South Asian nation, whose prime minister resigned as public anger over mismanagement of the economy boiled over into political violence. The ancestral home of the ruling Rajapaksa family in the southern district of Hambantota was set on fire, and at least eight people have been killed.
Sri Lanka’s forex reserves have fallen 4.7% in April to $1.8 billion compared with a total debt due this year of as much as $7 billion. The government has already halted payments on foreign debt pending talks for restructuring loans.The country will need around $4 billion over the next eight months to pay for imports of essentials.