* Inflation to stay at 4-6 pct, if oil stays near $90
* Monetary policy rates are appropriate - cbank
* No demand-side inflation pressure seen yet - cbank
By Shihar Aneez
COLOMBO, Feb 2 (Reuters) - Rising oil prices present the only threat to Sri Lanka's targeted economic growth of 8.5 percent this year, but inflation should remain steady between 4 percent and 6 percent, the central bank said on Wednesday.
The Indian Ocean nation's $50 billion economy rebounded sharply in 2010, growing an estimated 8.0 percent with economic life blooming after the end of a three-decade separatist war in May 2009.
The 2011 growth forecast assumes an average oil price of $90 a barrel. On Monday, Brent crude LCOc1 hit $100 a barrel for the first time since 2008 on fears Egypt's instability could spread into the Middle East, which along with North Africa pumps over a third of the world's oil.
"That is the only risk area we see for our economy," K.D. Ranasinghe, the central bank's chief economist, told Reuters in an interview.
However, Ranasinghe said inflation would remain stable this year barring a sharp oil price increase. The central bank has said it will remain between 4 percent and 6 percent, although many economists predict that it will move higher.
"Oil price is beyond our control. But we are yet to see demand side pressure due to excess capacity. So inflation could still remain at mid-single digits in line with our original estimation," he said.
The central bank on Jan. 15 in a surprise move cut the cost of borrowing to spur private sector growth, in spite of broad market worries over inflation. [ID:nSGE70A00Z] It is expected to announce its latest rate decision on Tuesday.
"The whole year, we have projected the inflation to remain at mid-single digits. Given that, we think the existing policy rates are appropriate," Ranasinghe said.
Sri Lanka's addition of coal-fired power generation and increased hydropower generation this year should help cut the oil import bill by roughly 10 percent of an estimated $2.5 billion to $2.8 billion, mitigating oil-related inflation, Ranasinghe said.
"Due to coal power, the oil imports will be reduced by nearly $300 million," he said.
Later this month, the first stage of the Norocholai power plant, on the northwestern coast, will open and bring an additional 300 megawatts (MW) online. It will eventually produce 900 MW.
Sri Lanka right now has a capacity of 2,689 MW, 60 percent of which runs on heavy fuel oil, making the import-reliant nation even more sensitive to oil price swings.
Heavy monsoon rains in catchment area are expected to boost hydropower generation this year, he said.
Sri Lanka's record oil bill of $3.4 billion was recorded in 2008 when global oil prices hit around $150 a barrel, resulting in record high inflation in that year.
The oil import bill was at $2.7 billion by November 2010, according to the latest central bank data. (Reporting by Shihar Aneez; Editing by Bryson Hull)
source - www.reuters.com
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