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Sri Lanka Keeps Rates Unchanged to Support Growth

Sri Lanka’s central bank Governor Ajith Nivard Cabraal lowered rates in July and August and has kept borrowing costs unchanged since then even as counterparts in neighboring India and Pakistan tightened monetary policy. Photographer: Munshi Ahmed/Bloomberg
Sri Lanka’s central bank Governor Ajith Nivard Cabraal lowered rates in July and August and has kept borrowing costs unchanged since then even as counterparts in neighboring India and Pakistan tightened monetary policy. Photographer: Munshi Ahmed/Bloomberg

Dec. 14 (Bloomberg) -- Sri Lanka’s central bank kept its benchmark interest rates unchanged for a fourth straight month to support economic growth as the nation emerges from a 26-year civil war.

The Central Bank of Sri Lanka left the reverse repurchase rate at 9 percent, the lowest level since November 2004, and the repurchase rate at 7.25 percent, according to a statement on the Colombo-based bank’s website today.

Sri Lanka is charting an economic policy aimed at accelerating growth and controlling inflation after President Mahinda Rajapaksa’s government defeated the separatist Liberation Tigers of Tamil Eelam in May 2009. Sri Lanka said Nov. 22 it will cut taxes on banks and builders, adopt an inflation target, and ease foreign-exchange rules.

“The government is keen to boost growth, create jobs and promote all round development after peace returned to the island,” Sarath Rajapakse, director of research at Capital Trust Securities Pvt. in Colombo, said before the report. “Sri Lanka’s inflation is less worrisome compared with the other countries in the South Asian region.”

Sri Lanka’s central bank Governor Ajith Nivard Cabraal lowered rates in July and August and has kept borrowing costs unchanged since then even as counterparts in neighboring India and Pakistan tightened monetary policy. He said Nov. 16 that rates are likely to stay unchanged until next year.

Consumer Prices

Consumer prices in the capital, Colombo, rose 7 percent in November from a year earlier. That’s almost half the average inflation rate in the five years through December 2009 after an expansion in farm cultivation, following the end of the war, boosted production.

India on Nov. 2 raised rates for the sixth time in 2010 to rein in consumer-price inflation running at more than 8 percent. Pakistan boosted its benchmark discount rate on Nov. 29 for the third time since late July. Pakistan’s inflation rate rose 15.5 percent in November from a year earlier, the highest rate among the 17 Asian economies tracked by Bloomberg.

Sri Lanka’s inflation will “remain subdued at mid-single digits, on an annual average basis, by end-year,” the central bank said on Nov. 16.

Rajapaksa, unveiling the 2011 budget in Colombo on Nov. 22, announced plans to lower the value added tax for lenders to 12 percent from 20 percent, reduce the levy on construction companies to 12 percent and offer breaks to tea and rubber companies.

Corporate Debt

The government will allow foreign investors to buy corporate debt in the country, let local residents purchase shares of foreign companies and enable insurers to invest up to 20 percent of their “long-term fund and technical reserves” abroad, according to the budget.

Sri Lanka plans to introduce inflation targeting in its monetary policy in order to keep prices low for long periods, the central bank said Nov. 22. It didn’t say what level of inflation it would target.

Sri Lanka’s $42 billion economy may grow 8 percent in 2010, and expand as much as 9 percent in 2011 as the government spends more on power and roads and tourists flock to the island nation, Cabraal said on Dec. 6.

Prospects of faster growth have also encouraged companies including Aitken Spence & Co. to step up investments in Sri Lanka.

Aitken Spence, Sri Lanka’s biggest operator of resorts, said Sept. 30 it will build a hotel with Six Senses Resorts & Spas in an investment worth as much as $40 million.

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

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net; Chris Anstey at canstey@bloomberg.net

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