REUTERS:
Sri Lanka may miss its 2012 growth projections due to the slower recovery in advanced economies and unfavourable developments in export markets, Central Bank Governor Ajith Nivard Cabraal yesterday. The Central Bank in March cut its projection for growth in the island nation’s US $ 59 billion economy to 7.2 percent from the 8 percent forecast set in January. “Unfavourable developments in Sri Lanka’s export destinations in terms of political and economical uncertainties could hamper reaching growth projections,” Cabraal said.

Europe accounts for 34 percent of Sri Lankan exports while the United States and Middle East buy 20 percent and 11 percent of its exports respectively. “The slower recovery in advanced economies and increase in global fiscal and financial uncertainties could also pose a downward risk,” he said. The central bank will make an assessment by end-June if it needs to cut the growth projection of 7.2 percent, Cabraal said. “We have flagged a possible risk and we believe that there is a potential risk to the growth. But we may have a clear idea on the growth by end of the first half of this year.” Sri Lanka’s economy grew by a record 8.3 percent last year, accelerating from 8 percent in 2010. Cabraal acknowledged that 2011’s record growth was accompanied by emerging pressures late in the year such as deficits in trade, current account, and balance-ofpayments amid a decline in gross official reserves and high credit growth. The trade deficit widened to a record US $ 9.7 billion, double that of 2010.

The current account deficit was 7.8 percent of the gross domestic product (GDP) last year, compared with 2.2 percent in the previous year and gross official reserves fell by a third in the second half of 2011 as the A looming balance-of-payments crisis prompted the International Monetary Fund (IMF) to withhold a tranche of its $2.6 billion loan, which forced the central bank to take corrective measures including raising policy rates, allowing a flexible exchange rate and restricting credit. The government also raised taxes on vehicle imports and increased fuel and electricity prices. Cabraal said that as a result of policy measures, the current account deficit should decline “significantly” this year. The central bank now targets a current account deficit of 3.8 percent of GDP this year and a $1.25 billion surplus in balance-of-payments.

Cabraal also said Sri Lanka is also likely to miss the inflation target this year due to increase in prices after the currency depreciated 11.2 percent this year. “We believe that inflation is going to miss midsingle digit target and end up slightly above it. But our policy measures would put a dampener on it.” Sri Lanka had a target of having inflation at 4-6 percent at the end of 2012, but the central bank’s latest data showed this has been revised to 6-7 percent. Cabraal also said that the bank intended to issue US $ 500 million to $1 billion in sovereign bonds later this year.