Sri Lankan Growth Quickens to Three-Decade High After War Ends

Sri Lanka’s economy expanded at the fastest pace in more than three decades as the end of a 26-year civil war in May 2009 boosted consumer demand and investment.

Gross domestic product rose 8 percent in 2010 from a year earlier, which is the most since 1978 and compares with a 3.5 percent gain in 2009, the statistics department said in a statement in Colombo yesterday.

Growth in Sri Lanka’s $42 billion economy was also supported by lower borrowing costs after the central bank cut  interest rates in January for the third time in seven months. Companies including Shangri-La Asia Ltd. and Nestle Lanka Plc announced investment plans after President Mahinda Rajapaksa’s government ended the Liberation Tigers of Tamil Eelam’s quest for a separate homeland, bringing an end to conflict.

“The economy is reaping the fruits of peace,” said Bimanee Meepagala, a Colombo-based analyst at NDB Aviva Wealth Management Ltd., the nation’s biggest non-state fund. “Foreign investment and tourism will continue to grow, but this year will be a bit more challenging with inflation pressures mounting.”

The benchmark Colombo All-Share Index, which has climbed 91 percent in the past year, fell 0.03 percent yesterday. The Sri Lankan rupee was little changed at 110.4 a dollar in Colombo, according to data compiled by Bloomberg.
Growth Outlook Sri Lanka aims to spur growth to 8.5 percent in 2011 and 9 percent in 2012, central bank Governor Ajith Nivard Cabraal said on Jan. 4.

Prospects of growing consumer demand have encouraged overseas investment. Shangri-La Asia plans to invest $500 million to build a hotel in Colombo, Deputy Economic Development Minister Lakshman Yapa Abeywardena said Dec. 16. Nestle Lanka said in January it plans to spend 10 billion rupees ($91 million) to expand in the country.

Tourist arrivals in the Indian Ocean island nation jumped 46 percent in 2010 from the previous year, according to the Sri Lanka Tourism Development Authority, boosting consumer demand. Cabraal left rates unchanged on March 8 for a second straight month. The bank’s reverse repurchase rate is 8.5 percent.

Sri Lanka’s central bank has refrained from raising rates since 2007 even after inflation accelerated to a 25-month high in February, saying prices are rising because of “supply constraints” caused by floods. The country’s policy stance contrasts with Asian nations from South Korea to India, which are boosting borrowing costs.

Rising Prices

Consumer prices in the Sri Lankan capital, Colombo, climbed 7.8 percent in February from a year earlier, according to  government data. Inflation is still less than the average 11.5 percent in the five years through December 2010, as an expansion in farm cultivation after the end of the war has boosted agriculture production.

Pressure on inflation caused by floods in the nation’s northern and eastern regions in January and early February may ease over the coming months, Cabraal said March 1.

By contrast, the Reserve Bank of India has boosted rates eight times in the past year compared with three in China and

four in South Korea. Indonesia lifted its reference rate last month for the first time this year after opting not to join counterparts in increasing rates in 2010.

Credit Growth

Sri Lanka’s central bank said this month that it will monitor “the high growth in credit to the private sector and overall trends in monetary aggregates” to check price gains. Also, rising international commodity prices, especially oil, remain a concern and the central bank will take “appropriate measures” if external price pressures persist, the bank said.

Personal and corporate credit grew 28.1 percent in Sri Lanka in January from a year earlier, more than double the pac in July, according to the central bank. Oil is up 13 percent for the quarter and 26 percent higher than a year earlier amid concern that increased Allied attacks in Libya will prolong supply disruptions and the escalating turmoil in the Middle East may curtail shipments.

To contact the reporter on this story:

Anusha Ondaatjie in Colombo at

anushao@bloomberg.net

To contact the editors responsible for this story:

Hari Govind at

hgovind@bloomberg.net

Stephanie Phang at sphang@bloomberg.net

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