CB cuts 2012 growth target to 6.5%; sees upturn in 2013

By Shihar Aneez

Reuters: The Central Bank has revised the island nation’s 2012 economic growth target to 6.5% on Wednesday from an earlier 6.8% due to its tight monetary and fiscal policies, the bank’s Deputy Governor said.

Data released on Wednesday showed economic growth slowed to nearly a three-year low of 4.8% in the third quarter, from 6.4% year-on-year growth in the second quarter.

Sri Lanka implemented sweeping policy measures to avert a balance-of-payments crisis in 2012 by raising key policy rates twice since February and floating the rupee currency.

The Central Bank also kept a lid on credit growth while the government raised fuel and electricity prices as part of an effort to contain the fiscal deficit.

“As a result of those tightening measures and as well as some of the supply side factors such as drought, the third quarter is the most affected the quarter,” Nandalal Weerasinghe, Deputy Central Bank Governor, told Reuters in an interview.

“As a result, for the whole year, we have revised down the growth to 6.5% from the earlier 6.8%. The global economy is also recovering which means our external sector could rebound.”

He said the country would see a $100 million balance of payments surplus this year compared to a deficit of over $1 billion in 2011, and the current account deficit would be reduced to 5% of the GDP this year compared to 8% in 2011.

The Central Bank last week surprised markets by cutting key policy rates for the first time in nearly two years in order to boost economic growth.

“We wanted to take some policy measures in advance to ensure growth,” Weerasinghe said. “In 2013, we will have 7.5% growth, as estimated earlier.”

The policy rates, the repurchase rate and reverse repurchase rate, had been at three-year highs until last week’s cut. The repurchase rate now stands at 7.50%, while the reverse repurchase rate is 9.50%.

Analysts and economists have expected the central bank to reduce interest rates by at least a further 50 basis points in 2013, depending on inflation trends.

Inflation has risen due to a supply shortage mainly in foods, and notched three-month high of 9.5% year-on-year in November, compared with 8.9% in October. That is still below the 42-month high of 9.8% struck in July due to an extended drought that hit the farm sector during the preceding months.

“Right now what I see is there is some space for us to ease monetary policy. There is no question about it,” he said adding that annual inflation will remain near 10% until March before easing.