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Wednesday, March 31, 2010

Sri Lanka’s March Inflation Slows for First Time in Six Months

By Anusha Ondaatjie

March 31 (Bloomberg) -- Sri Lanka’s inflation unexpectedly slowed in March for the first time in six months, giving the central bank room to keep interest rates low and support economic growth.

Sri Lanka and Pakistan, pummeled by war and terrorist attacks, are aiming to keep borrowing costs low to support economic growth and improve people’s livelihood. Sri Lankan central bank Governor Nivard Cabraal this month left interest rates unchanged at a five-year low, betting prices will ease.

“Growth has not yet taken off and the central bank will be keen to keep rates constant,” Saminda Weerasinghe, research manager at Acuity Stockbrokers Pvt. in Colombo, said before the report.

Cabraal has room to keep borrowing costs low because the current inflation rate is half the average between 2004 and 2009. He maintained the reverse repurchase rate at 9.75 percent and the repurchase rate at 7.5 percent on March 18. The next policy announcement is due on April 22.

Parliament Elections

Ensuring faster growth and low inflation is also critical for Sri Lankan President Mahinda Rajapaksa as his government faces parliamentary polls on April 8. Rajapaksa was reelected for a six-year term in January after defeating the Tamil Tiger rebels in May.

The president wants to accelerate growth to 7 percent in 2010 from a 3.5 percent expansion in 2009. Gross domestic product rose 6.2 percent in the three months ended Dec. 31 from a year earlier, the fastest pace in five quarters, the statistics department said yesterday.

In Pakistan, where terrorist attacks claimed 3,000 lives in 2009, the central bank on March 28 refrained from lowering interest rates as inflation stayed above 13 percent. The government says Pakistan needs to grow 6 percent annually to cut poverty. The economy may expand 3.4 percent in the year ending June 30, according to government estimates.

The approach of the central banks in Sri Lanka and Pakistan contrasts with that of India, South Asia’s biggest economy, which earlier this month raised interest rates for the first time in almost two years on concern faster growth may stoke inflation.

India’s economy may grow 8.2 percent in the year starting April 1, the finance ministry said in February. Inflation currently stands at a 16-month high of 9.89 percent, according to government data.

Cabraal said on March 18 that Sri Lanka’s inflation rate may fall in the coming months as food supply improves and the government cuts taxes to ease price pressures.

Since November, the government has reduced the import tax on sugar, milk powder, lentils, potatoes and onions. The end of the civil war has spurred vegetable and paddy cultivation, as well as fishing in the island’s north and east, the former stronghold of the separatist Liberation Tigers of Tamil Eelam.

source - http://www.businessweek.com