Sri Lanka's GDP Growth Slows as Prices Curb Spending

By Anusha Ondaatjie

(Bloomberg) --Sri Lanka's economic growth slowed for the first time in a year in the first quarter as inflation running above 25 percent and escalating violence in the South Asian island's civil war damped spending.

Gross domestic product expanded 6.2 percent in the three months ended March 31 from a year earlier, compared with 7.6 percent in the fourth quarter, the Department of Census & Statistics said today. That was less than the median forecast of 6.4 percent in a Bloomberg News survey of 10 economists.

Spending by consumers and companies is weakening as the central bank holds interest rates at a six-year high to cool the fastest inflation in at least four years. Sri Lanka's economic outlook ``depends critically'' on an end to the island's 25-year civil war, according to the International Monetary Fund.

``Growth is slowing due to the impacts of the worsening security situation on business confidence and high inflation increasing costs for companies,'' said Vajira Premawardhana, head of research at Lanka Orix Securities Pvt. in Colombo.

The yield on the 7.5 percent bond due in March 2009 fell about 5 basis points to 18.4 percent at 11:50 a.m. Colombo time, according to Ceylinco Shriram Securities Ltd. The rupee was little changed at 107.7 to the dollar, according to Hatton National Bank Ltd.

`Significantly Higher'

Consumer prices in the capital Colombo rose 26.2 percent in May from a year earlier, after increasing 25 percent in April, on higher food and energy costs. Annual inflation, or the 12- month moving average increase in prices, jumped to 19.8 percent in May.

Sri Lanka's 2008 inflation rate is likely to be ``significantly higher'' than previous estimates as oil reaches records, the central bank said on May 26.

Inflation may slow to 14 percent by the end of this year, central bank Deputy Governor W.A. Wijewardena said on May 15. The central bank said in January it was targeting annual inflation of about 10 percent for 2008.

Policy makers in Sri Lanka, who have kept the benchmark repurchase rate unchanged at 10.5 percent for 16 straight meetings, may need to consider increasing the proportion of deposits that commercial lenders must place with it or let the currency appreciate to cool runaway inflation, James McCormack, head of Asia-Pacific sovereign ratings at Fitch Ratings, said April 10.

Commodity Exports

Growth may slow to 5.8 percent this year amid central bank measures to cool inflation, according to Fitch.

Sri Lanka's economic growth is expected to accelerate this year as rising government spending and commodities exports counter weakening consumer demand, the central bank said on April 8. Gross domestic product may expand 7 percent, at the lower end of the range estimated in November, and up from 6.8 percent last year, the bank said in its annual report.

The government on Jan. 16 formally ended its 2002 cease-fire with the Liberation Tigers of Tamil Eelam, saying the rebels had used the accord to rearm and prepare for further attacks. Sri Lanka is seeking $1.8 billion in aid and investment to help rebuild the eastern province captured from the rebels in July.

Services, which represent about 60 percent of the economy, expanded 6.4 percent, down from 7.4 percent in the previous period, the statistics bureau said.

Industry, which accounts for 30 percent of the economy, expanded 6 percent from 8.5 percent in the fourth quarter. Farm output, about 10 percent of GDP, grew 5.9 percent from 6.7 percent previously.

Victoria's Secret

Sri Lanka, the world's fourth-biggest tea producer, has benefited from rising demand for commodities and food from emerging economies as sales to the U.S. weaken.

The South Asian economy exported a record $1 billion worth of the commodity in 2007 on higher prices, and may earn more this year as violence disrupted supplies from Kenya, according to the Sri Lanka Tea Board.

Sri Lanka's overseas sales, mainly garments for brands such as Victoria's Secret and Gap, have become less vulnerable to a U.S. slowdown as the island has secured more European markets, Central Bank Governor Nivard Cabraal said in January.

Exports climbed 11.3 percent to $2.49 billion in the first four months of 2008, according to the central bank. The bank expects overseas shipments to increase 10 percent this year.