Sri Lanka to cut growth to 7-7.5%

Reuters: Sri Lanka’s economic growth forecast will be lowered to a range of seven per cent to 7.5 percent due to tighter monetary policy and a rupee depreciation aimed at cutting the trade and current account deficits, the Central Bank said on Monday.

Central Bank Chief Economist Swarna Gunaratne also told Reuters the 2011 balance-of-payments deficit was $ 1 billion. On Friday, the Central Bank signalled it would cut the growth target for this year to no lower than seven per cent.

“It will be between 7-7.5 per cent. The exact figure will be decided at the monetary policy meeting on Tuesday. I think it is a rational estimation and a satisfactory growth in the current situation,” Gunaratne said in an interview with Reuters.

Growth at that level would be the slowest expansion since 2009’s 3.5 per cent and would ease off 2011’s estimated 8.3 per cent. The International Monetary Fund (IMF), which has given a $ 2.6 billion loan to Sri Lanka, last week said economic growth would be less than 7.5 per cent.

The Central Bank last month was forced to raise policy rates for the first time since 2007 and stop defending the rupee at a specific exchange rate, after the nation’s trade gap ballooned to a record and its current account deficit grew in 2011.

The oil bill was as usual the culprit for the trade deficit, which hit a record $ 9.7 billion, Gunaratne said. Out of that, $ 4.6 billion was for petroleum purchases, $ 1.8 billion for vehicle imports and $ 600 million for gold imports.  “The oil bill exceeded the target by $ 1.5 billion last year, she said. “We expect the oil bill to be $ 5.2 billion this year due to high oil prices with the average oil price around $ 118 per barrel compared to last year’s $ 108.”

 

The Central Bank spent more than $ 2.7 billion in foreign exchange reserves in the second half of 2011 to stave off depreciation. The rupee has depreciated more than six per cent since the Central Bank stopped defending it on 9 February.