Saturday, May 15, 2010

Sri Lanka’s Cabraal Says 5-Year Low Rates to ‘Stay’ (Update1)

By Susan Li and Anusha Ondaatjie

May 14 (Bloomberg) -- Sri Lankan central bank Governor Nivard Cabraal said that “encouraging” inflation figures mean he plans to keep the current stance on interest rates, after policy makers last month kept borrowing costs at a five-year low.

“It’s too early to tell” whether higher rates will be needed this year, Cabraal said in an interview with Bloomberg Television, speaking from Bloomberg’s Washington office yesterday local time. The central bank’s current policy will “stay” for now, he said.

Sri Lanka’s policy makers are seeking to stoke growth after the end of a civil war in 2009, a development that’s helped the nation’s stock market become one of the world’s best performers in the past year. The country is also seeking a loan disbursement from the International Monetary Fund to help bolster the South Asian economy’s development.

Cabraal said he’s “very positive” that the IMF team will see the country is on the right track, and that the fund understands why 2009 fiscal targets were missed. Highlighting that foreign-exchange reserves have exceeded targets, he said “I don’t see a risk” for the nation’s sovereign-debt ratings.

Consumer prices in the capital, Colombo, rose 5.8 percent in April from a year earlier, according to the statistics department. Inflation has averaged 12.6 percent in the five years through 2009. The central bank expects the economy to grow 6.5 percent in 2010, the fastest pace in three years.

Interest Rates

The Central Bank of Sri Lanka left the reverse repurchase rate unchanged at 9.75 percent, its lowest level since August 2005, and maintained the repurchase rate at 7.5 percent, according to a central bank statement on April 22.

Sri Lanka plans to nearly halve its budget deficit in the next three years as the end of the island’s 26-year civil war spurs economic growth and boosts revenue, Treasury Secretary P.B. Jayasundera said April 7.

The government aims to narrow the budget shortfall to 5 percent of gross domestic product by 2012 from 9.7 percent in 2009 and an estimated 7.5 percent in 2010, Jayasundera said.

Sri Lanka was supposed to reduce its budget deficit to 6 percent of GDP in 2010 from 7 percent in 2009 as part of a $2.6 billion bailout package the IMF gave the South Asian nation in July last year to help avert a foreign-exchange crisis.

The IMF said in February it will decide whether to grant Sri Lanka a third loan tranche of about $330 million after the government presents its 2010 budget. Fitch Ratings said in March that the island’s credit rating may be lowered if the government fails to narrow its budget shortfall.

An IMF mission was scheduled to visit Sri Lanka this week to discuss the 2010 budget of President Mahinda Rajapaksa’s newly elected government, according to remarks by Koshy Mathai, the fund’s resident representative, in Colombo on May 4.

Sri Lanka’s foreign-exchange reserves are at $5 billion, after dipping to $1.27 billion before the IMF rescue package was approved, according to Bloomberg data.

Rajapaksa’s United People’s Freedom Alliance won 144 seats in the 225-member assembly in the April 8 vote.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at

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