By Palash R. Ghosh | September 17, 2010 7:30 AM EDT
Sri Lanka's economy advanced by 8.5 percent during the second quarter of 2010 on an annual basis -- the highest quarterly growth rate recorded since 2002 – following a 7.1 advance in the first quarter.
The country, which suffered through almost three decades of civil conflict and violence until the government's May 2009 defeat of the Liberation Tigers of Tamil Eelam terrorist group, has clearly rebounded economically, with a peace-induced increase in foreign investment and tourism.
The government's statistics office said the country's agriculture sector grew by 5.1 percent, manufacturing by 8.9 percent, construction by 9.3 percent and services by 8.8 from a year earlier.
The International Monetary Fund (IMF), which recently extended a $2.6 billion standby loan facility to the country, forecasts "strong growth this year" for the economy, citing that "fiscal performance so far remains consistent with achieving the government's full-year deficit target of 8 percent of GDP."
The IMF also decreed that a recent interest rate cut by the Central Bank of Sri Lanka as "appropriate," citing the recovery in bank lending.
"External balances are strong," the IMF stated in its review of Sri Lanka's finances, "[and] remittance inflows continue at a high rate, tourism prospects continue to improve rapidly, and gross reserves remain at comfortable levels. The end of the 30-year war has led to a surge in investor enthusiasm, bolstered by the decline in the risk of a short-term balance of payments crisis -- and future growth prospects have improved markedly."
The IMF also said that Sri Lanka is satisfying the terms of its loan program.
"Performance under the program has been good," the body said. "End-June performance criteria on domestic budget borrowing, reserve money, and net reserves have been met. Financial sector reforms continue to go forward in line with the program."
However, given the near-term challenges presented by a global economic slowdown, IMF advised that Sri Lanka needs to implement fundamental tax reform, that is, to simplify the existing system, broaden the tax base, spread the tax burden more equitably, and support economic growth, all while boosting the revenue-to-GDP ratio.
The IMF also mentioned that Sri Lanka's private-sector investment "will need to play a critical role," in Sri Lanka's continued growth and stability.
Ashira Perera, international economist at Capital Economics, said that domestic demand in Sri Lanka should hold strong and offset the fading support from exports, citing that exports account for a relatively small percentage of GDP, at about 20 percent.
"The central bank policy rates look set to stay on hold for a long time but overheating fears are likely to climb during the course of 2011," she said.
"The next move in policy rates will probably be up rather than down."
In addition, S&P just upgraded both its foreign-currency debt rating (to B+ from B) and the local currency bond rating.
"The upgrade reflects the prospect of continued strong growth and the stabilization in the fiscal position through Sri Lanka’s IMF agreement," Perera noted. The budget deficit is on track to fall to the targeted 8 percent of GDP in 2010, from 10 percent in 2009, and the government will publish its plans for lifting tax revenues in its 2011 budget... in late November."
Perera has upgraded her GDP growth forecast and expect GDP to 8.0 percent in both 2010 and 2011.
"This implies that Sri Lanka will be one of the world’s high-fliers in terms of growth in coming quarters," she added.
"Inflation remains subdued and has averaged only 0.3 percent per month so far this year, or 3-4 percent [per annum]."
source - www.ibtimes.com
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