The Central Bank of Sri Lanka (CBSL) announced on Friday that it had raised policy rates for the first time since 2007 in a bid to check runaway credit growth, but the International Monetary Fund did not seem very impressed.

The Bank has hiked rates by 50 basis points and enforced a credit ceiling in the face of pressures.

Now, the repurchase rate and the reverse repurchase rate of the Central Bank will be 7.50 per cent and 9 per cent respectively, a released issued on Friday after the February 2 meet of the Monetary Review Board of the Bank said.

The Board viewed with alarm the “continuous increase in credit extended to the private sector by commercial banks” and said that this needed to be addressed to curtail import-related credit (thereby reducing the trade deficit and the current-account deficit) and ensure that inflation remains at the mid single-digit levels in the second half of 2012 as well.

The Monetary Board also decided to direct commercial banks to moderate their credit disbursements so that the overall credit growth in 2012 does not exceed 18 per cent of their respective loan book outstanding at the end of 2011.

Credit growth of up to 23 per cent will be allowed for those banks which finance the excess up to 5 per cent of the credit growth, from funds mobilised from overseas.

IMF view

The IMF welcomed the hike in rates and credit ceiling, saying that this would help rein in loan growth and narrow a widening external deficit in Sri Lanka. The IMF maintained that exchange rate flexibility should be part of the policy package.

“There was broad agreement that a decisive policy response was needed to put the economy on a sounder macroeconomic footing, especially given the current uncertain global environment,” said Brian Aitken, who led an IMF review team, in a statement.

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