Sri Lanka cuts policy rate, lifts import curbs

Mar 18, 2009 (LBO) – Sri Lanka has cut its de facto main signal policy rate that sets the ceiling on Interbank borrowing rates by 175 basis points to 14.75 percent, and also lifted margins on import letters of credit set late last year, the Central Bank said. The regulator has also eased curbs on the use of documents against acceptance (DA) terms for imports.

The curbs were slapped when a balance of payments crisis developed after September 2008, following an unsustainable dollar peg defence that drained reserves and encouraged capital flight.

Foreign bond holders who held almost 600 million dollars of government treasuries at the peak in mid 2008 have mostly sold out by March 2009.

Sri Lanka is in discussions with the International Monetary Fund for a bailout package which is expected to bring better macro-economic management to the country with market driven exchange rate management that can halt reserve hemorrhage.

An IMF team is due in the country in late March and analysts expect the bailout package to be ready by mid-April.

Updated The monetary authority said the policy rate cut was to signal the market, its “desire for a further reduction in market interest rates.”

Though the penal interest rate was brought down to