Sri Lanka set for record growth despite conflict
Monday, 30 July 2007
COLOMBO, July 29 (AFP): 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 per cent to 139 billion rupees (US$ 1.3 billion) to battle the insurgents.
Yet the bank last week said it was projecting 7.5 per cent growth for 2007, the strongest in 29 years, despite a mounting body count.
Sri Lanka's economy grew by 7.4 per cent 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 per cent 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 per cent 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 per cent in 2006 is forecast to fall to a still hefty 7.5 per cent this year.
The rupee has fallen by around three per cent 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.
The agencies based their analysis around security concerns and factors including the budget deficit and a sizeable debt-to-GDP ratio of 93 per cent.
Among positives, Sri Lanka received 2.3 billion dollars from foreign remittances last year, up from 1.9 billion in 2005. Money sent home by Sri Lankans abroad helped finance more than two-thirds of the trade deficit. Cabraal said the government plans a 500-million dollar bond issue this year to finance a five-billion-dollar portfolio of infrastructure projects.
And whatever its economic woes, Sri Lanka has always found overseas buyers for its debts, Cabraal said.
"Our issues have been oversubscribed more than once," Cabraal said.
Others agree. "The economy has proven resilience and the country has an unblemished debt service track record, which is good," said Paul Rawkins, London-based senior director of Fitch Ratings.
More than 400 million dollars was raised this year by selling rupee- denominated sovereign bonds to foreigners and about 200 million dollars was also picked up by placing rupee-denominated development bonds abroad.
"Sri Lanka is cashing in on global demand for exotic or non- investment grade bonds. The returns we offer are not that bad -- about one per cent over LIBOR (London Interbank Offered Rate)," said Ajith Fernando, head of Capital Alliance, an investment bank here. Three-month LIBOR stands at 5.36 per cent. "Sri Lanka has never defaulted, and it's a plus point among people who look to invest in exotic bonds," Fernando added.
Conflict between government troops and Tamil rebels has claimed more than 5,200 lives since late 2005, with ministers raising annual defence spending 45 per cent to 139 billion rupees (US$ 1.3 billion) to battle the insurgents.
Yet the bank last week said it was projecting 7.5 per cent growth for 2007, the strongest in 29 years, despite a mounting body count.
Sri Lanka's economy grew by 7.4 per cent 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 per cent 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 per cent 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 per cent in 2006 is forecast to fall to a still hefty 7.5 per cent this year.
The rupee has fallen by around three per cent 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.
The agencies based their analysis around security concerns and factors including the budget deficit and a sizeable debt-to-GDP ratio of 93 per cent.
Among positives, Sri Lanka received 2.3 billion dollars from foreign remittances last year, up from 1.9 billion in 2005. Money sent home by Sri Lankans abroad helped finance more than two-thirds of the trade deficit. Cabraal said the government plans a 500-million dollar bond issue this year to finance a five-billion-dollar portfolio of infrastructure projects.
And whatever its economic woes, Sri Lanka has always found overseas buyers for its debts, Cabraal said.
"Our issues have been oversubscribed more than once," Cabraal said.
Others agree. "The economy has proven resilience and the country has an unblemished debt service track record, which is good," said Paul Rawkins, London-based senior director of Fitch Ratings.
More than 400 million dollars was raised this year by selling rupee- denominated sovereign bonds to foreigners and about 200 million dollars was also picked up by placing rupee-denominated development bonds abroad.
"Sri Lanka is cashing in on global demand for exotic or non- investment grade bonds. The returns we offer are not that bad -- about one per cent over LIBOR (London Interbank Offered Rate)," said Ajith Fernando, head of Capital Alliance, an investment bank here. Three-month LIBOR stands at 5.36 per cent. "Sri Lanka has never defaulted, and it's a plus point among people who look to invest in exotic bonds," Fernando added.