Sri Lanka maintains growth goal at 7.8% despite drought

Tuesday, 25 March 2014 00:37 - - {{hitsCtrl.values.hits}}

Sri Lanka hopes commercial lending rates fall to 10-12% eventually
Drought has hit agriculture, power generation
Private sector credit growth down despite falling rates

REUTERS: Sri Lanka is maintaining its 7.8% economic growth target for this year despite a lingering drought because it thinks falling lending rates could spur investment, the country’s treasury secretary said on Monday. Treasury Secretary P.B. Jayasundera said the combination of lower interest rates and expansion in the export and construction sector could lead to a pickup in spending.

“There is no particular reason for growth to be revised either direction,” he told reporters in Colombo. Sri Lanka kept policy rates steady at multi-year lows on Friday as it hopes that slowing private sector credit expansion will rebound and push up the country’s growth pace. The Central Bank has cut the repurchase rate by 125 basis points (bps) and reverse repurchase rate by 175 bps to 6.5% and 8% respectively since December 2012 to spur growth, but commercial banks’ lending rates have still been high at around 15%. “Lending rates should stabilise between 10-12% at some point,” said Jayasundera, who has already ruled out any further rate cut during the next 2-3 months. The $ 67 billion economy’s private sector credit growth has slowed to near four-year low of 5.2% year-on-year in January, compared to the previous month’s 7.5%. “We are not in a mighty hurry to bring rates down, because it must be a very smooth adjustment,” Jayasundera said. Despite slowing credit expansion, economic growth picked up to 7.3% last year from a three-year low of 6.3% in 2012. Boosting growth were massive state-led infrastructure projects started after the end of a 26-year civil war in 2009.