Sri Lanka's Economy Probably Grew at Slowest Pace in Two Years
Sri Lanka's economy probably grew at the slowest pace in two years as Asia's highest interest rates and renewed violence between government forces and separatist rebels curbed spending.
Gross domestic product expanded 6.1 percent in the first quarter from a year earlier, after 6.2 percent growth in the three months to Dec. 31, according to the median forecast of 11 economists in a Bloomberg News survey. That's the slowest pace since the first three months of 2005. The central bank is due to release the figures in the capital, Colombo, tomorrow.
The South Asian nation's fastest economic growth in 30 years is threatened by attacks by the Liberation Tigers of Tamil Eelam, including air strikes on oil and gas plants near Colombo. Central Bank Governor Nivard Cabraal has increased borrowing costs five times in the past year to cool inflation, which rose to a decade high in January.
``Interest rates have been a key factor for slowing growth,'' said Geeth Balasuriya, analyst at HNB Stockbrokers Ltd. in Colombo. ``Unless there's some positive initiative on the peace front, the economy will deteriorate further.''
Sri Lanka is threatened with a resumption of civil war. A 2002 cease fire collapsed last year and two attempts to hold peace talks failed in Geneva. The LTTE bombed Royal Dutch Shell Plc and Indian Oil Corp. plants and an air force base in two raids since March 26.
Infrastructure Spending
The central bank increased the benchmark repurchase rate 0.5 percentage point to 10.5 percent in February.
Governor Cabraal expects the $26 billion economy to grow 7.5 percent this year and 8 percent in 2008 as infrastructure spending limits the impact of escalating tensions. Citigroup Inc. forecasts 6 percent growth this year.
``Based on the current economic climate, targets may prove to be a bit beyond the government's reach,'' said Yasitha Karunaratne, an analyst at First Capital Equities Ltd. in Colombo. ``Should the conflict escalate beyond the current situation, we could see higher government expenditure on defense, to the detriment of spending on other sectors.''
Unrest discourages private investment and hinders the flow of goods to and from the north and east of the island, where the fighting is taking place.
The Department of Census and Statistics said this month that the violence and a drought that curbed agricultural production slowed first-quarter growth.
Curbing Inflation
The government says higher borrowing costs have helped to rein in inflation fanned by increased oil prices and higher import costs because of a depreciating currency.
Consumer prices in Colombo rose 13.7 percent from a year earlier in May, the smallest increase in 12 months. They climbed 16.3 percent in April.
Sri Lanka's economy grew 7.4 percent last year, buoyed by a 10 percent expansion in Western province, the home of the textile and clothing industries, the biggest export earners. That was the most since gross domestic product climbed by 8.2 percent in 1978, according to the central bank.
The next monetary policy review is due July 23.
The following table shows economists forecasts for growth in gross domestic product from a year earlier.
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GDP
Forecaster YoY
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Median 6.1%
Average 6.3%
Number of Forecasts 11
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Asia Securities 7.2%
Boston Asset 6.1%
Capital Alliance 6.0%
Ceybank Securities 6.0%
First Capital Equities 6.1%
HNB Stock Brokers 7.0%
Lanka Orix Securities 6.9%
National Asset Management 6.2%
National Savings Bank 6.1%
UBS 6.0%
Unit Trust Management 6.0%
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Last Updated: Fri, 29 Jun 2007 14:50:00
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