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* UPDATE 2-Sri Lanka confident 2012 growth will be 7 pct
Wed, Jul 11, 2012, 07:44 pm SL Time, ColomboPage News Desk, Sri Lanka.

July 11 (Reuters) COLOMBO- Sri Lanka's central bank and finance ministry asserted on Wednesday that the country can still have economic growth of about 7 percent this year in spite of domestic problems and the global economic slowdown.

The central bank, which on Wednesday kept policy rates unchanged for a third straight month as expected, said it was confident the economy would meet its 7.2 percent growth target this year.

Later in the day, the secretary of the Finance Ministry said that thanks to tough monetary and fiscal policy measures taken this year, growth "is likely to moderate towards 7 percent in 2012."

In 2011, Sri Lanka had record economic growth of 8.3 percent.

P. B. Jayasundera, secretary of the ministry and treasury, told a conference that the sharp depreciation of the rupee will affect trade, banking, leasing, finance and construction.

Also, a drought is having an impact on agriculture and power generation, he said.

The central bank's decision to hold policy rates came despite annual inflation hitting a 41-month high of 9.3 percent in June. It blamed the high rate on a statistical rebasing, the drought and administrative price changes.


The rupee has fallen nearly 18 percent against the U.S. dollar since November, which analysts said was driving inflation.

"The policy rates should have been raised because it is demand-pull inflation due to the rupee depreciation and availability of credit," said an analyst at a private bank.

Jayasundera said inflation may stay near the June level in the short term. "The monetary policy strategies and supply side initiatives have targeted to keep inflation at single digit level, though the next few months it is likely to be in upper single digit level," he said.

The International Monetary Fund has said annual inflation in Sri Lanka could hit 9.5 percent.

The IMF has trimmed its growth forecast to 6.75 percent from 7.5 percent.


Sri Lanka's central bank is sticking with its GDP growth forecast of 7.2 percent.

"At the moment our reaction is we will hold the growth number as announced," Governor Ajith Nivard Cabraal told Reuters.

Cabraal also said the prolonged drought should not have significant impact on economic growth.

Sri Lanka's oil import bill may spike because it has to buy more oil for thermal power generation as the drought reduces hydroelectric power supply.

However, Cabraal said there would be a sharp decline in imports and that would help achieve the trade deficit target of $9.2 billion, compared with last year's record $9.7 billion.

Read More:: Reuters (Source)