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Cash-strapped As police sprayed tear gas at hundreds of students protesting the economic crisis, Sri Lanka's central bank raised interest rates by a record 700 basis points.

Food and fuel shortages, as well as prolonged power outages, have sparked weeks of widespread anti-government protests, with calls for President Gotabaya Rajapaksa to quit.

In the most recent protests, students attempted to march to the national parliament on Friday, and police deployed water cannons to disperse the enraged throng.

Monks, who helped install Rajapaksa in November 2019 by rallying the Sinhala-Buddhist majority, were also seen taking part in protests in Colombo, where several firmly stood against police wearing gas masks and brandishing riot shields.

Demonstrators across the country held signs reading "Gota go home," calling on Rajapaksa and his administration to resign in the wake of the country's greatest economic crisis since its 1948 independence.

Controlling the damage -

After the rupee fell almost 35 percent in a month, the Central Bank of Sri Lanka upped its benchmark lending rate to 14.5 percent to "stabilise the currency rate."

The deposit rate was also raised by seven percentage points to 13.5 percent, despite news that Sri Lanka's rupee was the world's worst-performing currency, edging out the Russian ruble, according to reports.

Nandalal Weerasinghe, the bank's newly appointed governor, claimed attempts in the previous year to regulate foreign exchange markets and maintain interest rates artificially low contributed to the unprecedented economic instability.

"We are now in damage control mode," Weerasinghe said at his first press conference since taking over for Ajith Cabraal, who was essentially forced out on Monday with the country on the verge of bankruptcy.

"If rates had been hiked slowly over time, we would not have had to make such a sudden increase," Weerasinghe added, vowing to loosen currency controls imposed by his predecessor.

The bank said the rate hike was necessary because it believes the island's inflation, which is already at record levels, could worsen.

In March, the Colombo Consumer Price Index jumped 18.7%, with food inflation above 25%, although private estimates put inflation at almost 50% for the month.

As fears increase that Sri Lanka would default on its $51 billion external debt, international rating agencies have downgraded the country.

Rajapaksa appointed a group of specialists last week to organise a debt restructure.

His government is preparing for bailout talks with the International Monetary Fund, and officials from the finance ministry said the panel will devise a plan for sovereign bondholders and other creditors to take a haircut.

"What Sri Lanka wants to avoid is a hard default," a ministry source told AFP on condition of anonymity.

"It will be a negotiated debt restructure with the IMF's assistance."

Meetings with the IMF are expected to begin next week, but finance minister Basil Rajapaksa, the president's brother, and practically the whole cabinet resigned on Sunday.

His successor, Ali Sabry, resigned after only one day in office, leaving the country without a leader. Sabry told parliament on Friday that he was still working because no one else wanted the finance responsibility.

Push from Europe -

Diplomats from European Union member nations headquartered in Colombo, which are a significant export market for Sri Lanka, demanded on Friday that the government promptly undertake economic reforms.

"We emphasise the severe urgency of the situation," the diplomats said in a joint statement, "which necessitates the authorities to begin in-depth consultations with the International Monetary Fund."

Public outrage is at an all-time high, and thousands of people are expected to take part in what will almost certainly be the largest protest since the crisis began on Saturday.

Essentials are in short supply due to a broad import embargo imposed by Sri Lanka in order to preserve its meagre foreign currency reserves in order to pay its debts.

The key tourism business has also been affected hard in recent years by Islamist bombings in 2019 and the coronavirus outbreak, which dried up remittances from Sri Lankans living overseas.

Opposition parties have rejected a presidential overture to form a unity government in favour of calls for Rajapaksa's resignation.

Government mismanagement, years of accumulated debt, and ill-advised tax cuts, according to economists, have aggravated the issue.