Thursday, February 28, 2008

Sri Lanka's Inflation Probably Slowed as Loan Growth Cools

Feb. 28 (Bloomberg) -- Sri Lanka's inflation probably slowed in February as interest rates at a 5 1/2-year high helped damp consumer spending and loan growth.

Consumer prices in the capital Colombo rose 19.5 percent from a year earlier, after gaining 20.8 percent in January, according to the median estimate of nine analysts in a Bloomberg News survey. The statistics department will release the data tomorrow at 3 p.m. in Colombo.

Sri Lanka's central bank last week kept its benchmark interest rate at 10.5 percent, the second highest in Asia, for a 12th straight meeting in a bid to cool inflation without jeopardizing economic growth. Governor Nivard Cabraal is trying to revive the island's $27 billion economy, after growth slowed to an estimated 6.7 percent in 2007 from 7.4 percent in 2006, amid renewed civil war.

``Tight monetary policy has been able to bring down money- supply growth significantly,'' said Vajira Premawardhana, head of research at Lanka Orix Securities Pvt. in Colombo. ``Still, the central bank can't have rates unduly high as they want economic growth.''

The central bank is keeping monetary policy tight with its daily open-market operations to adjust the amount of cash in the banking system and controlling credit demand.

The government also plans to build stocks of imported wheat, sugar, rice and lentils to help curb inflation.

Interest rates are ``sufficient'' to control inflation, which will begin to slow in the second half of this year, Cabraal said in a Feb. 4 interview.

Credit Growth

Credit growth in Sri Lanka's private sector, including consumers, slowed to 19.3 percent in December, compared with 24 percent a year earlier, according to the central bank.

Credit to state companies is expected ``to improve'' this year, the bank said on Feb. 21.

Higher oil prices are one of the ``main risks and difficulties we are facing,'' Cabraal said on Feb. 4.

State-owned Ceylon Petroleum Corp. and Lanka IOC Ltd., the Sri Lankan unit of Indian Oil Corp., raised fuel prices on Jan. 13 for the first time in almost six months to cut losses caused by record oil costs.

The South Asian nation needs to rein in inflation to achieve 7 percent economic growth this year, Cabraal said Jan. 2.

Fighting has intensified after the government ended a 2002 cease-fire with the Liberation Tigers of Tamil Eelam rebels on Jan. 16.

Table of forecasts

Forecaster From year 12-Month
Earlier Moving Average
Median 19.5% 16.8%
Average 19.6% 16.9%
High 22.1% 17.9%
Low 16.7% 16.1%
Number of Forecasts 9 9
Capital Alliance 19.2% 16.8%
Ceylinco Shriram 19.5% 16.8%
Commercial Bank 22.1% 17.1%
First Capital 21.4% 16.9%
HSBC Holdings 19.0% 16.7%
Lanka Orix Securities 20.2% 16.1%
Seylan Bank Asset Management 20.5% 17.9%
Standard Chartered 18.0% 16.6%
Unit Trust 16.7% 17.1%