April 22 (Bloomberg) -- Sri Lanka’s central bank reduced interest rates for the fourth time in as many months to bolster an economy growing at the weakest pace since 2001.

The Central Bank of Sri Lanka cut the repurchase rate to 9 percent from 10.25 percent and lowered the so-called penal rate to 13 percent from 14.75 percent, according to a statement on the bank’s Web site today. The Colombo-based central bank left its reverse repurchase rate unchanged at 11.75 percent.

Governor Nivard Cabraal is taking advantage of slowing inflation to lower rates before the International Monetary Fund imposes conditions on the island in return for a proposed emergency loan of as much as $1.9 billion. The Sri Lankan rupee has dropped 2.9 percent in the past week to a record low amid concern an agreement with the IMF may be delayed.

“Inflation is tapering off and that is enabling the monetary authorities to further reduce interest rates,” said Bimanee Meepagala, an analyst at Eagle NDB Fund Management Co. in Colombo.

Sri Lanka is seeking financial aid from the IMF and others to pay for debts as a three-decade conflict with the Liberation Tigers of Tamil Eelam draws to an end. Lower rates may encourage lenders to extend cheaper loans to stimulate consumer spending in the $32 billion economy, buffeted by the collapse of overseas sales amid the global recession and waning domestic demand.

The IMF loan was likely to be finalized in the next few weeks and there was no truth to rumors that the U.S. was trying to block the aid because of concerns over the government’s handling of its fight against Tamil rebels, Cabraal told the Daily News yesterday. A $500 million loan from Libya was also on track, the newspaper reported the governor as saying.

Inflation Slows

Inflation in Sri Lanka slowed to 5.3 percent in March from a three-year high of 28.2 percent in June last year as commodity prices eased. Exports fell 18.4 percent in February to $524.3 million from a year earlier, the third straight monthly decline.

“Given the continuing decline in the general price level and the demanding conditions facing the real sector, the central bank is of the view that its monetary policy stance should be eased further,” today’s statement said. The rate cuts are expected to result in “more active lending” by commercial banks and augment credit flows to the economy, it said.

India, Pakistan

Sri Lanka joins India and Pakistan in lowering borrowing rates this week as the South Asian nations grapple with the impact of the worst global recession since World War II. India yesterday cut rates for the sixth time since October to an all- time low and Pakistan on April 20 reduced its benchmark interest rate for the first time since 2002.

Shrinking overseas orders and decelerating domestic demand may cause Sri Lanka’s economy to expand 2.5 percent in 2009, compared with more than 6 percent growth in the last four years, the central bank said in its annual report on April 6.

The economy grew 4.3 percent in the three months to Dec. 31 from a year earlier, the weakest pace of expansion since at least 2003.

Sri Lanka will recover its growth momentum in 2010 with an expected rebound in the global economy, the central bank said earlier this month. Growth in 2010 is expected at 5 percent and 6 percent in 2011, according to the bank.

The central bank expects economic activity to surge in certain areas of north and east Sri Lanka liberated by the armed forces and where the government plans to start rehabilitation projects, Cabraal said April 6. “The end of the war will be looked at positively by foreign investors.”

The conflict with the Liberation Tigers of Tamil Eelamm, seeking a separate Tamil homeland in the north and east of the island, is drawing to a close as the army claims it has captured more territory from the rebels.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

Last Updated: April 21, 2009 22:29 EDT