Sri Lanka Keeps Interest Rate at Three-Year Low to Boost Growth

By Anusha Ondaatjie, 18th August 2009, www.bloomberg.com

Sri Lanka’s central bank kept its benchmark interest rates at a three-year low to help stoke an economic revival after the end of the island’s 26-year civil war.

The Central Bank of Sri Lanka held the reverse repurchase rate unchanged at 11 percent for a second straight month and maintained the repurchase rate at 8.5 percent, according to a statement on the Colombo-based bank’s Web site today.

Governor Nivard Cabraal last month raised the central bank’s 2009 growth forecast to as much as 4.5 percent from an earlier estimate of 2.5 percent, citing increased investments and reconstruction projects. Cabraal on July 21 predicted inflation this year at 5 percent.

“The central bank will probably watch inflation next month in keeping with a cautious monetary policy stance,” said Anushka Shah, an economist at Citigroup Global Markets in Mumbai.

Consumer prices in the capital, Colombo, rose 1.1 percent in July from a year earlier after gaining 0.9 percent in June.

Cabraal said July 31 there is “space for interest rates to come down further,” helping the government reduce the budget deficit in accordance with a $2.6 billion International Monetary Fund loan agreement.

Sri Lanka plans to raise $500 million from overseas investors to help rebuild the war-torn island after the IMF loan shored up the nation’s finances, Cabraal said.

The IMF’s aid package and improved investor confidence with the end of the civil war have helped attract foreign flows and eased local borrowing costs, the central bank said July 23.

Budget Deficit

The central bank had this year reduced the repurchase rate by 2 percentage points and lowered the reverse repurchase rate from 12 percent.

In return for the IMF loan, Sri Lanka has agreed to reduce its budget deficit to 5 percent of gross domestic product by 2011 and maintain flexibility in the exchange rate in order to build foreign reserves to cover 3 1/2 months of imports and bolster the economy.

Cabraal expects an average $150 million to be spent by the government, companies and foreign aid agencies each month over the next several years to rebuild roads, schools and hospitals in the country’s northern region, which was the last bastion of the rebel Liberation Tigers of Tamil Eelam.

The IMF expects Sri Lanka’s economy to grow more than 3 percent this year and accelerate in 2010.

“Easing interest rates remains essential in order to spur consumer demand, given the central bank’s ambitious growth forecast,” said Bimanee Meepagala, an analyst at Eagle NDB Fund Management Co. in Colombo.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.