Indeed, the country's GDP expanded by 7.1 percent year-over-year in the first quarter, driven largely by its strong agriculture and services sectors, robust industrial production and soaring tourism.
Ashira Perera, international economist at Capital Economics, forecast that GDP will rise 7.0 percent this year, before climbing to the current government target of 8.0 percent in 2011.
Perera partially attributes the country's improved economic performance to the end of the civil war which has opened up the North and East of Sri Lanka to increased crop production and has reduced the cost of food products. Indeed, land recovered from the losing Tamil Tiger rebels after the end of the civil war has helped to boost cultivation.
In addition, inflows of remittance payments from Sri Lankan emigres living overseas are soaring and will likely continue to support household spending, while bank lending is also accelerating.
Perhaps most importantly, peace and expectations of rapid economic growth have attracted more foreign investment.
For example, Emirates Telecommunications Corp., the largest phone company in the United Arab Emirates, recently divulged plans to spend up to $163-million over six months to expand its network in Sri Lanka. Minor International, Thailand’s biggest hotel operator, has acquired a controlling stake in Kani Lanka Resort & Spa, a resort in Kalutara, off Sri Lanka’s southern coast, to take advantage of increased tourism to the island.
In addition, Sri Lanka is improving its infrastructure – highlighted by the construction of the massive Hambantota Port project, which is expected to create new thousands of new jobs and lift private sector investment. Sri Lanka's President Mahinda Rajapaksa said the Hambantota port will serve as a prelude to the massive economic development ahead of the country.
Despite the growing economy, inflation is easing.
On Friday, the Central Bank of Sri Lanka unexpectedly reduced its reverse repurchase rate by 50 basis points to 9.0 percent – the lowest level since November 2004 – while keeping the repo rate on hold at 7.25 percent, in response to some benign inflation data.
On an annualized basis, CPI has fallen from 6.9 percent in February to 4.3 percent to July – far below the average inflation rate of 12 percent seen during the 2004-2009 period.
The central bank also cut its policy rates in early July.
Sri Lanka’s policy moves are in stark contrast to some of its neighbors, including India, Malaysia and Thailand, which have recently raised interest rates to quell rising prices and prevent asset bubbles.
“Inflation is unlikely to become a threat any time soon which means that a further easing of monetary policy cannot be ruled out for the near term,” said Perera.
“However, the local economic upswing looks set to stay strong and we judge it most probable that policy rates will now stay on a prolonged hold, before eventually moving up in 2011.”
Perera forecasts that inflation will average 5.0 percent in both 2010 and 2011.
Sri Lanka likely remained an unknown to much of the outside world until late 2004 when it was hit by the devastating tsunami that killed tens of thousands of people on the island.
Leopard Capital, a Cambodia=based private equity fund that specializes in investing in the Frontier Markets (and plans to launch a Sri Lanka fund in the near future) believes the country will provide rich dividends for foreign investors, due to its highly educated work force, democratic traditions, an open economy, and a well-regulated stock market, among other positive attributes.
“During the war years many avoided visiting Sri Lanka and perceived it to be a very poor country that suffering the evils of a typical war-ravaged nation,” Leopard said.
“Despite the war, it is remarkable that the country has been able to post strong economic growth, and to maintain almost first world social indicators.”
Leopard describes Sri Lanka as a “middle-income country” with an “ambitious but realistic” plan to upgrade its infrastructure.
In addition, despite the civil war, Sri Lanka has recorded a “very satisfactory" rate of growth, averaging about 6.4 percent in the last six years and has a GDP of $42 billion with a per capita income of $2014. Notably, the nation's per capita income doubled in a period of about five years while war was raging.
“Now with the end of hostilities and rapid development projects on ground, policy makers are confident and are targeting to ensure that Sri Lanka again doubles its GDP by 2015,” Leopard stated.
“This will lead to significant domestic demand led market opportunities. The most opportune moment for investors to enter the economy is now, considering the positive factors already enumerated and the policy initiatives that are already in place and likely to continue unchanged under the new government.”
Perera cautions that Sri Lanka's exports and the industrial sector will likely be hurt by the European Union’s (EU) decision to withdraw some trade concessions – reportedly due to the EU's disappointment in the country's failure to respond to demands to improve human rights.
“But the extent of the negative impact is hard to quantify at this stage and in the end may well be small,” she said.
”Moreover, domestic demand looks well-placed to take the lead as external conditions become more challenging.”
Sri Lankan exports account for about 20 percent of the island’s $42 billion economy.
source - http://www.ibtimes.com
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