GDP grows by 6% in 1Q

•  Construction booms, thanks to Govt. projects and State spending help
• Growth tops Reuters poll forecast of 5.7%

Reuters: Sri Lanka’s first quarter economic growth beat market expectations, which economists attributed it to high State investment in construction that compensated for sluggish private sector expansion at a time borrowing costs are high.

Government data released on Monday said the economy grew 6% in the first quarter from a year earlier. That was slower than the annual pace of 6.3% in the last quarter of 2012, but above a Reuters poll forecast for January-March of 5.7%.

“The broad market was expecting slower growth because the consumption of the private sector and consumers were somewhat slow due to higher interest rates in the first quarter,” said Danushka Samarasinghe, Head of Research at TKS Securities.

The slack private sector activity “was compensated by continuous Government investment activities predominantly in construction activities,” he said.

The construction sector expanded 27.6% in the first quarter from a year earlier to Rs. 174.37 billion ($ 1.36 billion), while Government services grew 13.7% to Rs. 111.64 billion, data from the Census and Statistics Department showed.

The service sector grew at 4.3% year-on-year in the first quarter, the industrial sector 10.7% and agricultural sector 2%.

The economy had 8% annual economic growth in the first quarter of last year.

For all of 2013, the Central Bank has forecast 7.5% expansion.

“With this 6% growth, we are on track of achieving 7.5% growth,” Central Bank Governor Ajith Nivard Cabraal told Reuters.

He expects private sector growth will expand in the second half with the measures the Central Bank has already taken including a policy rate cut in May.

In 2011, Sri Lanka had record growth of 8.2%, and the following year the pace cooled to a three-year low of 6.4%.

The International Monetary Fund has estimated growth of 6.3% in 2013, attributing the slower rate to sluggish demand from Sri Lanka’s main export destinations such as Europe and the United States.

The Central Bank has said economic growth has been slowed by commercial lending rates that have stayed high despite reductions of policy rates by 75 basis points to one-year lows since December.

On 7 June, the Central Bank kept key policy rates steady after slashing them 50 basis points in May. The repurchase rate and the reverse repurchase rate are at one-year lows of 7% and 9%, respectively.

Last week, the Central Bank said it could take more steps to reduce lending rates if commercial banks do not fall in line with monetary policy rate cuts.