"There has been massive policy easing and market interest rates have come down."
Growth Support
Sri Lanka cut policy rates from a penal 19.0 percent in to 11.50 percent so far in 2009, and government security yields have plummeted, though bank lending rates are falling at a slower pace.
Sri Lanka's economic growth slowed to 1.5 percent in the first quarter, as a collapse in global demand buffeted exports and domestic interest rates were rocketed in the last quarter of 2008 to counter a balance of payments crisis.
The central bank has since floated the rupee and is now collecting foreign reserves.
Both imports and exports have shrunk, narrowing the trade deficit so far this year.
Sofat said Sri Lanka's trade deficit is structural and is beneficial for a country that is growing. A trade deficit shows the import of goods that contribute to economic activity financed by remittances and official aid flows.
Sri Lanka is also likely get some support from an external pick-up, with signs that the US economy was starting to turn around. Intra regional Asian trade and tourism was also likely to revive.
Inflation
Inflation in Sri Lanka was now in low single digits. Sofat said the low inflation will increase disposal income of the people allowing the domestic economy to grow.
Growth in many Asian economies had started to slow by the middle of last year due to a massive "inflation shock", even before the impact from a US slowdown became widespread.
"Economic growth in Asia started slowing down in the middle of last year," Sofat said.
"When inflation is high it erodes purchasing power. It stops consumption."
HSBC was forecasting inflation to be around 5.0 percent in Sri Lanka, though it could return to a long-run average of 11 percent two years down the line.
Prospects
Though credit growth was picking up, so far this year most of the money has been taken by the government, which could crowd out the private sector.
Sofat said Sri Lanka has spent about 6.0 percent on infrastructure despite military expenditure being about 4.0 percent of gross domestic product (GDP).
A three decade war with Tamil Tiger separates ended in May with the military wiping out the group's leadership.
There were hopes that military expenditure can be diverted to growth.
Sofat said Vietnam was spending about 10.0 percent of GDP on infrastructure, which in turn helps draw in private investment.
Sri Lanka's foreign direct investment (FDI) was averaging a "disappointing" 500 million US dollars year, mostly due to investor nervousness about the war, she said.
But Vietnam, an 80 billion US dollar economy was attracting 11.0 billion dollars in FDI a year.
"When political devolution happens as the international community sees it happening, FDI will go up," she said.
Sofat said a delayed International Monetary Fund loan would also help strengthen the country's prospects, when it comes.
Updated
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