Sri Lanka GDP May Rise 8%, Priority Is Inflation, Cabraal Says

The Sri Lankan economy may expand 8 percent this year as the island’s central bank strives to contain price pressures while supporting growth, Governor Ajith Nivard Cabraal said.

“Our priority is inflation,” Cabraal said in Colombo in his annual monetary policy speech today. Agriculture, tourism and construction will be the main drivers of the expansion in gross domestic product, he said.

Sri Lanka’s central bank left interest rates unchanged for an 11th month in December, saying rising food supplies will help damp inflation as it joined neighbors from India to Indonesia in holding borrowing costs to shield growth. The island devalued its rupee by about 3 percent in November to spur exports as Europe’s fiscal crisis threatens to sap demand for Asian goods.

The rupee’s exchange rate is competitive and Sri Lanka has to maintain stability in the currency, Cabraal said. While gross foreign-exchange reserves were at a “comfortable” level of $6 billion at the end of 2011, the nation is feeling some balance of payments pressure, he also said.

The benchmark Colombo All-Share Index (CSEALL) of stocks fell 0.4 percent as of 12:44 p.m. local time today. The Sri Lankan rupee was little changed at 113.88 per dollar, according to data compiled by Bloomberg. It closed at 110.32 per dollar before the Nov. 22 devaluation.

The $50 billion Sri Lankan economy expanded 8.3 percent in 2011, Cabraal said. Inflation, which held at close to 5 percent in December, may be 5 percent to 6 percent in 2012, he said.

Foreign Investment

The end of a civil war in 2009 has boosted agricultural supplies, encouraged tourism and attracted foreign investment. Foreign-direct investment exceeded $1 billion last year, Cabraal said.

Still, financial weakness is a “key” credit-rating constraint for the island, Moody’s Investors Service said in a report today.

Sri Lanka’s debt-to-GDP ratio fell to 78 percent in 2011 and the island will work toward further reducing public debt, Cabraal said.

He said an International Monetary Fund mission is due in Colombo this month. The fund has disbursed $1.75 billion to Sri Lanka under its $2.6 billion loan program.

The nation is keen to complete the IMF program, Sarath Amunugama, senior minister for international monetary cooperation, said by telephone from Colombo today. At the same time, it is “not pressed” for foreign exchange and the government won’t rush into more rupee adjustments, he said.

The Central Bank of Sri Lanka’s next interest-rate (SLMMRVRT) decision is due Jan. 13. Its repurchase rate is 7 percent and the reverse repurchase rate is 8.5 percent.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Stephanie Phang at sphang@bloomberg.net

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