Lanka set for record growth despite conflict

Best economic performance in three decades:

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.

Although annual defence spending increased 45 per cent to 139 billion rupees (1.3 billion dollars), the Bank last week said it was projecting 7.5 per cent growth for 2007, the strongest in 29 years.

Sri Lanka’s economy grew by 7.4 per cent in 2006 fuelled by telecom, garment and banking sectors.

“We admit terrorism has an impact on us,” Central Bank of Sri Lanka Governor Ajith Nivard Cabraal told AFP, 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.

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 percent this year against the dollar.

Sri Lanka received US$ 2.3 billion from foreign remittances last year, up from US$ 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.

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 US$ 400 million was raised this year by selling rupee-denominated sovereign bonds to foreigners and about US$ 200 million 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.

Nor has violence deterred the US$ 530 million in foreign direct investment so far this year which is projected to exceed the US$ 600 million mark in 2006.

Most of the money from overseas has gone into telecom and IT-related services, distantly followed by garments and building of high-rise properties.

Tourism is undoubtedly suffering from the conflict. Arrivals fell 30 per cent to 30,810 in June from 44,066 a year earlier, though Cabraal dismisses the fall, saying “tourism never earned us more than US$ 500 dollars a year.”

However, negative publicity about the conflict is a problem when trying to drum up business abroad, he admitted.

“It affects investor confidence, tourism, forcing people to put off plans to start projects until things are better.”