Sri Lanka Raises 2009 Growth Forecast as War Ends, Rates Ease

By Anusha Ondaatjie, July 1st 2009, Bloomberg.com

Sri Lanka’s central bank raised its growth forecast for 2009 as slowing inflation helps ease borrowing costs and the South Asian island rebuilds after the end of three decades of civil war.

The $32 billion economy is expected to grow between 3.5 percent and 4.5 percent this year, up from a 2.5 percent expansion forecast in April, central bank Governor Nivard Cabraal said today at a conference in the capital Colombo.

Sri Lanka’s inflation eased to the weakest pace in more than five years in June, giving the central bank room to further cut interest rates to spur spending and investment and make up for slowing exports. The government declared victory over the separatist Tamil rebels on May 16 after driving them from their northern stronghold and killing their chief Velupillai Prabhakaran.

“We have gone through one of the most difficult periods and we can now look to the future,” Cabraal said. “We are also now in a situation where inflation is less of a concern and the currency reasonably stable.”

Cabraal on June 16 lowered the central bank’s reverse repurchase rate to 11 percent from 11.5 percent, and cut the repurchase rate to 8.5 percent from 9 percent, in the third such move this year.

Consumer prices in Colombo rose 0.9 percent in June from a year earlier after gaining 3.3 percent in May, the statistics agency said yesterday.

The Sri Lankan rupee has been little changed around 114.9 per dollar in the past month, after rising 4.3 percent in May as the government succeeded in crushing the Liberation Tigers of Tamil Eelam.

The International Monetary Fund said on May 21 it is near an agreement to lend Sri Lanka almost $2 billion to repay debt and rebuild the economy.

Cabraal said today that he was confident of the IMF program coming through. He said Sri Lanka needed to improve its infrastructure to reap the benefits of the end of war.