Sri Lankans brace for high growth and high inflation

November 14, 2006 (LBO) – Sri Lanka may have to settle for high inflation in the coming months as the government is keen to keep up the high economic growth momentum, treasury secretary P B Jayasundara said Tuesday. Though the budget will announce measures to contain demand pressure, it may not go as far as putting limits on state borrowings from the banking sector which is fueling inflation and destabilizing balance of payments.

“It depends on what level of inflation you want to target,” Jayasundera said.

“If you want to have four percent inflation you can stop everything. Expenditure can be curtailed to the extend you want to have a trade-off. You may get inflation down to five percent but you may also get growth down to 3 percent.”

The Colombo Consumer Price Index (CCPI), which measures 12-month headline inflation, now running at a high of 17.2 percent in October from 15.4 percent in September.

However officials are promising a higher spend on infrastructure which is vital to boost growth and improve productivity.

Jayasundera says capital expenditure is mostly foreign financed, with projects like the Norochcholai being 100 percent foreign financed.

Sri Lanka is due to post a near 8.0 percent growth in the nine months to Sept, Jayasundara said told reporters during a pre-budget news briefing. Economic growth for the six months to June topped 8.0 percent.

Deputy Finance Minister, Ranjith Siyambalapitiya says the island is heading for an 8.0 percent growth next year, the best in 28 years, when the economy expanded by 8.2 percent.

The International Monetary Fund said Tuesday that Sri Lanka’s economy in under siege from galloping inflation, a wider current account deficit, declining official reserves and a high debt service burden.

Large fiscal deficits and a high level of public debt are sources of macro-economic instability while inflation is galloping away and reforms lagging, the international lender said.

Jayasundera says the exchange rate has also come under some pressure due to the heavy oil bill, because payments are still made on earlier contracts.

The Sri Lankan rupee sank to historical lows on Tuesday, closing at 108.20 to the U.S. dollar on sustained demand by banks and importers to meet large import bills.

A net oil importer, Sri Lanka is due to spend 2.2 billion dollars this year, from 1.6 billion dollars in 2005.

“We are seeing the lag effect of our oil purchases, where we spent 80 dollars a barrel in July and August. We are now beginning to buy oil at 60-70 dollars a barrel. Seasonal demand for the Christmas season is also putting pressure on the exchange rate,” he explained.

However other economists say massive monetary expansion, as well as a fundamental overvaluation caused by widening inflation differentials between Sri Lanka and her trading partners during the last two years is pushing the currency down. .