Sri Lanka set for record growth despite conflict

Sri Lanka set for record growth despite conflict -
Times Of India

COLOMBO: The recent escalation in fighting in Sri Lanka has not derailed the nation's economy, with the island on track to record its fastest growth in nearly three decades, according to the central bank.

Conflict between government troops and Tamil rebels has claimed more than 5,200 lives since late 2005, with ministers raising annual defence spending 45 percent to 139 billion rupees (1.3 billion dollars) to battle the insurgents.

Yet the bank last week said it was projecting 7.5 percent growth for 2007, the strongest in 29 years, despite a mounting body count.

Sri Lanka's economy grew by 7.4 percent in 2006 fuelled by the telecom, garment and banking sectors. "We admit terrorism has an impact on us," Central Bank of Sri Lanka Governor Nivard Cabraal said, referring to the conflict, which economists estimate cuts about two percent off the annual growth rate.

But "with or without terrorism, Sri Lanka is on a growth path," he said. There are, however, other less positive economic indicators in an island where Tamil Tigers have been fighting for an independent homeland since 1972.

Inflation is running at 17.0 percent stoked by costly oil imports, excessive credit demand and the central bank printing too much money, economists say.

Oil imports have driven up transport costs, making food more expensive for the 19.5 million population. "Inflation will continue to soar as long as overall governance is poor, budget deficits are high and the state continues to spend lavishly on oil, fertiliser and food subsidies," said Harsha de Silva, an economist at LIRNEAsia, a private regional think-tank.

The government's budget deficit of 8.4 percent in 2006 is forecast to fall to a still hefty 7.5 percent this year. The rupee has fallen by around three percent this year against the dollar while other currencies in the region have risen.

Sri Lanka's credit outlook carries a negative "junk bond" rating of BB-minus from credit-rating agency Fitch- three levels below investment grade- while Standard and Poor's rates it B-plus.