Friday, March 28, 2008

Sri Lanka GDP Growth Unexpectedly Accelerates to 7.6%

March 28 --Sri Lanka's economic growth unexpectedly accelerated as increased exports of tea and rubber offset restraints on spending from five-year high interest rates and renewed violence in the island's civil war.

Gross domestic product expanded 7.6 percent in the three months ended Dec. 31 from a year earlier, compared with 7 percent in the third quarter, the Department of Census & Statistics said today. Economists expected a 6.6 percent gain.

Growth in the South Asian island economy has been boosted by record commodity prices, which has pushed up export earnings for rubber and tea. That's made up for weaker domestic demand as the central bank holds interest rates at the highest level since 2002 to rein in inflation, now running above 20 percent.

``Agriculture exports are holding up but manufacturing and services are affected by inflation,'' said Geeth Balasuriya, analyst at HNB Stockbrokers Pvt in Colombo. ``This year will be tough given high rates.''

The Sri Lankan rupee was little changed at 107.81 to the dollar at 11:55 a.m. in Colombo, according to First Capital Treasuries Ltd. The yield on the 7.5 percent bond due in March 2009 was holding at 18.5 percent, according to First Capital.

Consumer prices in the capital Colombo rose 21.6 percent in February from a year earlier, after increasing 20.8 percent in January. February's inflation was the fastest since 2004, according to data compiled by the statistics department for a new index going back to that year.

`Tight' Policy

Sri Lanka's central bank has kept its benchmark repurchase rate unchanged at 10.5 percent for 13 straight meetings. Governor Nivard Cabraal said in a March 22 interview that ``tight monetary policy'' will be maintained through the end of this year on concern surging oil prices may fan inflation.

The $27 billion economy expanded 6.8 percent last year, from 7.7 percent in 2006, the statistics bureau said today. The Washington-based IMF expects growth of 6 percent in 2008, the slowest pace in three years.

The government on Jan. 16 formally ended its 2002 cease- fire with the Liberation Tigers of Tamil Eelam saying the rebels had used the accord to rearm and prepare for further attacks. Sri Lanka is seeking $1.8 billion in aid and investment to help rebuild the eastern province captured from the rebels in July.

Services, which represent about 60 percent of the economy, expanded 7.4 percent in the fourth quarter, matching the gain of the previous three months, according to today's report.

U.S. Slowdown

Industry, which accounts for about a third of GDP, gained 8.5 percent from 7.5 percent in the third quarter. Farm output grew 6.7 percent from 3.7 percent previously.

``Public expenditure on power and road projects may have boosted industry,'' said Vajira Premawardhana, head of research at Lanka Orix Securities Pvt. in Colombo. ``Inflation is hurting consumer demand and a U.S. recession will slow trade and growth going forward.''

Overseas sales from Sri Lanka, mainly garments for brands such as Victoria's Secret and Gap, have become less vulnerable to a U.S. slowdown as the island has secured more European markets, Cabraal said in a Jan. 31 interview.

Sri Lanka, the world's second-biggest supplier of black tea, exported a record $1 billion worth of the commodity in 2007 on higher prices, and may earn more this year as violence disrupted supplies from Kenya, according to the Sri Lanka Tea Board.

Exports climbed 22.7 percent to a record $863 million in December from $704 million a year earlier, the central bank said on Feb. 15.

by Anusha Ondaatjie, Bloomberg