Sri Lanka Economic Growth Seen Slowing in 3rd Quarter (Update1)

Sri Lanka Economic Growth Seen Slowing in 3rd Quarter (Update1)

By Anusha Ondaatjie

Dec. 28 (Bloomberg) -- Sri Lanka's economic growth probably slowed for a second quarter as interest rates at a four-year high and renewed violence in the island's civil war hit spending.

The South Asian economy expanded 7 percent in the third quarter from a year earlier, after a 7.6 percent gain in the three months to June 30, according to the median forecast of five economists in a Bloomberg News survey. The central bank will release the figures in Colombo tomorrow at 8:00 a.m., Chitrani Nanayakkara, head of the bank's communications department, said in a telephone interview.

The Central Bank of Sri Lanka on Dec. 15 raised its key interest rate to the highest among 14 Asia-Pacific economies tracked by Bloomberg to cool inflation that's climbed to a 10- year high. Sri Lanka's economy may expand more than 8 percent in 2007, the fastest pace in almost 30 years, if political violence on the island can be curtailed, central bank governor Ajith Nivard Cabraal said last month.

``There is a slowdown in the growth momentum and if rates continue to rise, it will affect future investment,'' said Yolan Seimon, research manager at John Keells Stock Brokers Ltd. in Colombo. ``We also don't foresee a major turnaround for the better on the peace process.''

Sri Lanka's central bank has lifted interest rates four times this year to curb the pace of price increases.

Consumer prices in the capital Colombo rose 19.8 percent in November from a year earlier, after increasing 17.2 percent in October, the Department of Census and Statistics said Nov. 30. That's the most since October 1996.

Renewed Violence

Sri Lanka's peace process collapsed as violence escalated this year and talks in Geneva in October ended in failure. The Liberation Tigers of Tamil Eelam have been fighting for two decades for a separate homeland in the parts of northern and eastern Sri Lanka it controls, in a conflict that has killed more than 60,000 people.

President Mahinda Rajapaksa, elected in November 2005 with a mandate to renegotiate a peace treaty with Tamil separatists, is raising spending on the army, navy and air force by 44 percent next year to a record 139 billion rupees ($1.3 billion).

The island's cease-fire, brokered by Norway in 2002, helped bring about uninterrupted growth in the country's $24 billion economy. Gross domestic product expanded 6 percent in 2005.

International donors, led by the U.S., Japan, the European Union and Norway, have appealed to both sides to come to peace talks to prevent a resumption of war.

Rising Exports

Cabraal has said this year's projected growth rate of 8 percent is ``intact'' as the island also turns to exports to bolster the economy.

Sri Lanka's exports surged 25.6 percent to a record $734 million in August as the island shipped more tea, rubber and clothes. Exports fell 11.5 percent in October, according to latest central bank figures.

``The agriculture sector is also showing a slowdown, and with interest rates going up, growth will taper down further in the final quarter,'' said Rajive Dissanayake, research manager at HNB Stock Brokers Ltd. in Colombo.

Table of forecasts

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GDP

Forecaster YoY

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Median 7.0%

Average 7.0%

Number of Forecasts 5

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Commercial Bank of Ceylon 6.4%

HNB Stock Brokers 6.8%

John Keells Stock Brokers 7.0%

Lanka Orix Securities 7.5%

Unit Trust Management 7.5%

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