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Sri Lanka economy slows to 6.8 percent

COLOMBO - Sri Lanka’s economic growth slowed to 6.8 percent in 2007, official data showed on Tuesday, as activity was hit by escalating fighting and high oil and commodity prices.

The growth of 6.8 percent was down from 7.4 percent in 2006, the central bank said, and was broadly in line with its expectations.

“This performance is commendable as it was achieved in a challenging environment of heightened security concerns arising from intensified terrorist activities and rising petroleum and commodity prices in international markets,” the central bank said, releasing its 2007 annual report.

Growth was largely driven by the services sector with robust demand in telecommunications, shipping and banking services.

The bank forecast growth of seven percent for this year amid rising exports of such items as garments and tea but it added a sharp climb in commodity and fuel prices were “threatening” price stability.

The latest figures showed Sri Lanka’s year-on-year inflation hit 28.1 percent in March, its highest level in the past decade.

The bank blamed inflation on high global crude oil, commodity and grain prices. However, the International Monetary Fund said inflation was due mainly to loose fiscal and monetary policies rather than high oil prices.

Sri Lanka’s inflation has also worsened since government forces ended a six-year truce with the Liberation Tigers of Tamil Eelam (LTTE) in January and fighting erupted with the guerrillas in the island’s troubled north.

The government has been increasing money supply as it seeks to pay for the war, analysts say.

The central bank’s optimistic growth projection contrasted with the forecast by the Asian Development Bank (ADB) last week. The ADB said Sri Lanka’s economic expansion would weaken to 6.0 percent this year due to global economic weakness and high domestic interest rates to control surging inflation.

HSBC economist Prakriti Sofat said she agreed with the ADB that ”some tempering in export growth consistent with weaker overseas demand” could slow the 27-billion-dollar economy further this year.

Last week, Fitch Ratings cut Sri Lanka’s already below investment grade sovereign credit rating due to escalating violence, soaring inflation and Colombo’s greater reliance on commercial borrowing overseas.

Fitch reduced Sri Lanka’s rating one notch to B plus from BB minus, saying it saw no swift end to the long separatist conflict that is bleeding the economy.

Sri Lanka has never defaulted on a foreign loan, but the downgrade came as the central bank asked Standard Chartered Bank and Deutsche Bank last month to raise 300 million dollars to meet ongoing expenses.

Sri Lanka last year raised 500 million dollars through a sovereign bond.

The LTTE has been fighting for autonomy for ethnic minority Tamils in the Sinhalese-majority island’s north and east since 1972, a conflict that has killed tens of thousands of people.

Still, despite security concerns, Sri Lanka drew a record 734 million dollars in foreign direct investments in 2007, up from 600 million dollars the previous year, mainly into such sectors as the fast-growing telecommunications and information technology industries.