Sri Lanka’s Economy Expands 8%, Faster Than Expected

December 15, 2010, 5:06 PM EST

By Anusha Ondaatjie

Dec. 15 (Bloomberg) -- Sri Lanka’s economy expanded faster than analysts estimated, stoking price pressures that may force the central bank to raise interest rates.

Gross domestic product rose 8 percent in the three months ended Sept. 30 from a year earlier after advancing 8.5 percent in the previous quarter, the statistics department said in a statement in Colombo today. The median of five estimates in a Bloomberg News survey was for a 7.6 percent gain.

Sri Lanka’s central bank said yesterday it will take “appropriate” steps to check any “build up of demand pressures” after it kept borrowing costs unchanged for a fourth straight month. The end of a 26-year civil war in the nation has encouraged investments from companies including Aitken Spence & Co., helping make Sri Lanka’s benchmark All-Share Index the world’s second-best performer this year.

“With growth strengthening, the central bank will be concerned about inflation,” Sanjeewa Fernando, an analyst at CT Smith Stockbrokers Pvt. in Colombo, said before the report. “If inflation heads toward double digits, the central bank will surely tighten monetary policy.”

The Sri Lankan rupee was little changed at a two-year high of 110.93 per dollar at 3:28 p.m. in Colombo today, according to Standard Chartered Bank. The yield on the bond maturing in November 2013 was unchanged at 8.25 percent. The All-Share Index fell 0.2 percent.

Rate Stance

Governor Ajith Nivard Cabraal yesterday held the central bank’s benchmark reverse repurchase rate at 9 percent, the lowest level since November 2004, and the repurchase rate at 7.25 percent, after lowering them in July and August.

Consumer prices in the capital, Colombo, rose 7 percent in November from a year earlier, the most since February 2009, after gaining 6.6 percent in October.

Cabraal reduced borrowing costs in 2010 to support economic expansion even as counterparts in neighboring India and Pakistan tightened monetary policy. He said Nov. 16 that rates are likely to stay unchanged until next year.

India on Nov. 2 boosted rates for the sixth time in 2010 to rein in consumer-price inflation running at more than 8 percent. Pakistan increased its benchmark discount rate on Nov. 29 for the third time since late July. Pakistan’s inflation rate rose 15.5 percent in November from a year earlier, the highest rate among the 17 Asian economies tracked by Bloomberg.

Sri Lanka is charting an economic policy aimed at accelerating growth and controlling inflation. Policy makers said Nov. 22 they will cut taxes on banks and builders, adopt an inflation target, and ease foreign-exchange rules.

Consumer Demand

Consumer demand and investments are growing in the Indian Ocean island nation after President Mahinda Rajapaksa’s government defeated the Liberation Tigers of Tamil Eelam rebels in May 2009.

Sri Lanka’s personal and corporate credit grew 15.5 percent in September from a year earlier, almost double the level in July, according to the central bank. Tourist arrivals rose 46 percent in the 11 months through November from a year earlier, according to the nation’s tourism agency.

Aitken Spence, Sri Lanka’s biggest operator of resorts, said Sept. 30 it will build a hotel with Six Senses Resorts & Spas in an investment worth as much as $40 million. Profit at John Keells Holdings Plc., the country’s largest company by market value, rose almost five times to 2.9 billion rupees ($26.2 million) in the quarter ended Sept. 30.

The Colombo Stock Exchange index has climbed about 90 percent this year, behind only Mongolia among benchmarks tracked by Bloomberg.

Tax Cuts

Rajapaksa, while unveiling the 2011 budget in Colombo on Nov. 22, announced plans to lower the value-added tax for lenders to 12 percent from 20 percent, reduce the levy on construction companies to 12 percent and offer breaks to tea and rubber companies.

The government will also allow foreign investors to buy corporate debt in the country, let local residents purchase shares of foreign companies and enable insurers to invest up to 20 percent of their “long-term fund and technical reserves” abroad, he said.

Sri Lanka plans to introduce inflation targeting in its monetary policy in order to keep prices low for long periods, the central bank said Nov. 22. It didn’t say what level of inflation it would target.

The International Monetary Fund said Dec. 13 that Sri Lanka’s economy remains “strong” and GDP is likely to grow about 7.5 percent this year.

--Editors: Cherian Thomas, Brendan Murray

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net Chris Anstey at canstey@bloomberg.net

source - www.businessweek.com