Thursday Jul 02, 2009
Sri Lanka has upgraded its growth forecast to more than three percent this year following the end of the island's decades-old ethnic conflict, the central bank chief said Wednesday.

With the government declaring the end of fighting in mid-May, the bank expects economic expansion of 3.5 to 4.5 percent in 2009, up from an earlier projection of 2.5 percent to 3.0 percent at the beginning of the year.

"We have gone through one of the most difficult periods and we can now look to the future," central bank governor Nivard Cabraal told businessmen.

Analysts said the end of the war had opened avenues for wider economic activity and will spur future investments, specially into areas like infrastructure to reap the post-war benefits.

"A lot of domestic factors, the end of war, rehabilitation, re-construction and improvement from agriculture will drive growth," said Prakriti Sofat, a Singapore-based economist with HSBC.

But she said some investors would be more comfortable when an International Monetary Fund standby loan materialises to boost foreign reserves, which fell by more than two thirds when the central bank sold dollars to defend the local rupee last year.

Cabraal said the island would not "beg" for foreign aid even though a 1.9 billion dollar bailout from the IMF has been delayed due to pressure from Western nations who want war crimes investigations.

The governor said Sri Lanka was confident the IMF loan will eventually come through.

He said consumer prices had also eased on the South Asian island, with inflation in June hitting an all-time low of 0.9 percent from 3.3 percent reported in May, due to lower food and energy prices.

"We are also now in a situation where inflation is less of a concern and the currency reasonably stable," Cabraal said.

The monthly inflation rate has been falling steeply since October 2008 on a tight monetary policy.

The bank has slashed interest rates in a bid to boost credit growth as the country emerges from the conflict with Tamil Tiger rebels.

However, said Harsha de Silva, lead economist of regional think tank LIRNEAsia, the government sucked up most of the available credit and did not spend it in productive sectors.

"Credit to the private sector has grown only 1.0 percent in the year to April 2009. Credit to the government went up 82.0 percent and credit to government corporations went up 66 percent (in the same period)," de Silva said.

Of the government credit expansion, Sofat said about four percent of gross domestic product (GDP) was spent on military-related expenses, while six percent of GDP was diverted to build infrastructure.

"Over time, hopefully we can see the military-related costs coming down and... diverted towards infrastructure projects," Sofat said.

Source: AFP