Violence, oil cast shadow on Sri Lanka

May 11 (Dow Jones)–The course of Sri Lanka’s peace process has become crucial to the country’s economy, as high oil prices threaten double-digit inflation. High oil prices may also force the central bank to hold back an anticipated cut in interest rates, which could have spurred the economy and offset some of the pressure caused by the escalating ethnic conflict, economists say.

The government and the central bank expect the economy to grow 7% this year, but economists say the target may be difficult to achieve.

If the violence continues, gross domestic product growth may slow to around 5.5%, below last year’s 6%, they say.

“Higher oil prices will have an impact on this year’s balance of payments. And if the security threat lingers, the country may be faced with a lack of additional donor funding, which is linked to progress in the peace process,” said Chanaka Wickramasuriya, country head at Fitch Ratings Lanka Ltd.

Last year, donors pledged $1.656 billion in aid to help with post-tsunami reconstruction, more than twice the $700 million-$800 million the country generally receives each year.

However, continuing vi