Lanka’s economy grows 8.1%, trade deficit in contraction

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*Strong fundamentals: ‘Even if oil prices increase, inflation would remain at single digits’

Sri Lanka’s economy grew 8.1 percent in 2010 with agriculture, services and manufacturing sectors making significant contributions, Central Bank Deputy Governor Dharma Dheerasinghe said. “Strong growth and favourable macroeconomic fundamentals will ensure that inflation stays within at single digit levels this year, even if oil prices are to increase,” he said addressing a business forum in Colombo yesterday (29).

“2009 was a bad year and the economy recorded a growth rate of 3.5 percent, but this has increased to 8.1 percent in 2010 and in the medium term it is expected to reach 8.5 percent this year and around 9 percent in 2012 and 2013,” he said addressing the CMA Business Forum which was jointly organised by RAM Ratings Lanka.

Earlier this year, Central Bank Governor Ajith Nivard Cabraal said economic growth for 2010 was estimated at 8 percent.

“We also have strong fundamentals. Inflation was always high averaging 12 percent between 1978 and 2008, but now we are in the mid-single digit level. There was virtually a balance of payments crisis a few years ago, but the IMF came to our support and the programme is on track and will be completed next year. We have reserves to finance imports for six-and-a-half months.

“On the fiscal side, there is strong consolidation taking place. The budget deficit was 9.9 percent in 2009 but it has been brought down to 8 percent in 2010. It will further reduce to 6.8 percent this year and thereafter, below 5 percent.

“Interest rates which have been higher than 20 percent are today much lower, making it feasible for business to borrow and this has been a tremendous impetus to the economy. The exchange rate is also stable and more predictable,” Dheerasinghe said.

He said that since the end of the thirty year conflict, one thirds of Sri Lanka’s landmass and two thirds of its coastal belt was free to contribute to the economy. “All sectors of the economy, agriculture, services and manufacturing, have equally contributed towards Sri Lanka’s growth,” he said.

He went on to say that Sri Lanka’s export earnings for January had grown 72 percent from a year ago, while the import bill grew at a much slower pace, around 20 percent.

“Export earnings in January grew 72 percent which is a significant achievement because it was without GSP Plus trade concessions (for exports into the EU). Imports also grew at a much slower pace, around 20 percent. Import growth is not necessarily a bad thing. Imports on capital goods increased and also imported raw materials for exports, which is a good sign as it suggests exports are growing and has potential to grow further,” Dheerasinghe said.

Dheerasinghe said the trade deficit had contracted in January and that the Central Bank expects this trend to continue. “The trade deficit is contracting,” he said. Dheerasinghe did not give any figures but the Central Bank is expected to release its external sector review one of these days. Trade data is usually released between the 20th and 23rd each month.

He said all these factors went into the Central Bank’s firm belief that inflation pressures could be controlled this year.

“We saw supply-side constraints due to the floods earlier this year, and prices are expected to subside with the recovery of crops and after the New Year season. Even if world oil prices should increase, we believe we would be able to manage it because our (macroeconomic) fundamentals are strong and inflation would remain at single digit levels this year,” Dheerasinghe said.

He said it was not necessary for the Central Bank to increase policy interest rates.

The International Monetary Fund, releasing the sixth tranche under the US$ 2.6 billion standby facility arrangement said it was “happy with Sri Lanka’s macro economic stability and fiscal reforms of the government”.

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