Sri Lanka’s Economy Grows at Fastest Pace This Year. End of War and 5-Year-Low Interest Rates Spurr Consumer and Company Spending

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

Sri Lanka’s economy grew at the fastest pace this year as the end of the civil war and interest rates at a five-year low spurred consumer and company spending.

Gross domestic product expanded 4.2 percent in the three months ended Sept. 30 from a year earlier after gaining 2.1 percent in the previous quarter, the statistics department said in a statement in Colombo today.

The defeat of Tamil Tiger rebels in May this year after 26 years of war has encouraged some of the island’s biggest companies including John Keells Holdings Plc and Aitken Spence Plc to expand their business. The central bank has room to maintain rates at current levels because of low inflation, Governor Nivard Cabraal said last month.

“The end of the war has rejuvenated economic activity in Sri Lanka,” said Bimanee Meepagala, an analyst at Eagle NDB Fund Management Co. in Colombo. “As the infrastructure in the war-affected areas gets put in place and credit demand picks up, we will see the growth momentum really take off.”

The International Monetary Fund, which granted Sri Lanka a $2.6 billion aid package in July to rebuild roads and schools, expects the island’s growth to pick up from this year.

Sri Lanka’s benchmark Colombo All-Share index, has doubled this year, and is the world’s best performer after Russia. Since the end of the fighting in May, Sri Lanka’s rupee has gained 0.76 percent to 114.25 against the U.S. dollar.

Companies Expand
John Keells, Sri Lanka’s biggest diversified company, said last month it will invest about $100 million to build new resorts to benefit from an economic resurgence after the war.

Aitken Spence Plc., Sri Lanka’s biggest operator of resorts, plans to expand its hotel and shipping businesses while Commercial Bank of Ceylon Plc, the nation’s biggest private lender by assets, aims to extend more loans in the island’s northern and eastern regions, which were recaptured from the Tamil Tigers.

Cabraal has cut lending rates five times this year to revive growth as inflation plunged from a record high in June 2008 to a five-year low in September. On Dec. 14, he maintained the reverse repurchase rate at 9.75 percent and held the repurchase rate at 7.5 percent.

Consumer prices in the capital, Colombo, rose 2.8 percent in November from a year earlier after gaining 1.4 percent in October. Cabraal aims to keep inflation below 10 percent this year and next to spur spending.

Appropriate Rates
Policy rates are at an appropriate level to support growth and are likely to remain at current levels “in the near future,” Cabraal said in a Nov. 26 interview.

“This will result in quite a bit of activity mid next year, especially in areas like housing that came to a grinding halt over the last 24 months because people couldn’t afford to borrow,” Ajit Gunewardene, deputy chairman at John Keells, said in an interview in Colombo on Dec. 14. “We’re expecting property development to kick in countrywide.”

The central bank wants to help lift growth to as much as 6 percent in 2010 from 3.5 percent in 2009.

Commercial bank loans rose to 1.18 trillion rupees ($10.3 billion) in September, the first expansion this year, from 1.17 trillion rupees in August.

President Mahinda Rajapaksainstructed state banks to slash lending rates by about 7 percentage points from Oct. 28 to government employees, farmers, small businesses and industries including fisheries and tourism. Non-state banks followed by reducing their rates too.

Sri Lanka, which makes garments for Marks & Spencer Group Plc, The Gap Inc. and Victoria’s Secret, will also see a recovery in overseas orders from the first quarter of 2010, Cabraal said last month. Sri Lanka’s exports have dropped for 10 consecutive months.

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