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Economy expands, 'no pressure from defense'

Sri Lanka’s economy will expand at the fastest pace in eight years in 2005 and maintain that growth rate next year as it rebuilds after the December tsunami disaster, Treasury Secretary P.B. Jayasundera says.



“I strongly believe that this year’s growth will be 6 percent plus,” Jayasundera, the civil servant in charge of planning next month’s budget, said in an interview on Monday.



“Given exports growth, the expansion in agriculture and a revival in tourism, we are on a solid growth path,” he said.



Increased tax revenue has helped, as has a continued decline in defense spending since a February 2002 cease-fire with the Tamil Tigers. “Defense is no longer exerting pressure on expenditure,” Jayasundera said.



The recovery of Sri Lanka’s $20 billion economy from a two-decade civil war between the government and the Tamil Tigers has been hampered by the tsunami disaster, which killed 39,000 people and left half a million homeless.



President Chandrika Kumaratunga’s government is expanding spending even as it tries to cut domestic borrowing and pare interest costs.



The government, which received aid and debt-relief pledges of $3 billion, will announce additional spending on damaged infrastructure in a Nov. 8 budget, Jayasundera said.



The economy expanded 5.4 percent in 2004 and is expected to grow between 5 percent and 5.5 percent this year, the central bank said last month. It last grew more than 6 percent in 1997, when it expanded 6.3 percent.



Sri Lanka’s recovery could be further strengthened by $4.5 billion in aid pledged by international donors on condition that peace talks between the government and LTTE, which broke down in April 2003, resume.



Jayasundera said the deficit this year would be between 8 percent and 8.2 percent of gross domestic product, rising to 8.5 percent in 2006. The central bank said in May that a deficit of around 9 percent of GDP was likely this year, up from 8 percent in 2004.



Sri Lanka recorded a budget deficit of 5.6 percent of GDP in the first nine months of this year, compared with a deficit of 6 percent in the same period in 2004, the state-run Daily News reported Wednesday in an advertisement.



Tax revenue rose to 10.4 percent of GDP, from 9.9 percent in the January-September 2004 period, the newspaper said. Foreign loan financing of the deficit accounted for 1.2 percent of GDP in the nine months to Sept. 2005, up from 0.6 percent of GDP the year before.



Sri Lanka’s economy grew 6 percent in the three months to June 30 from a year earlier, the fastest pace in more than a year, as tea and rubber output rose and roads and hotels were rebuilt.



“Commodity prices have been a blessing to us and will help keep the balance of payments at a surplus of $200 million this year and around $150 million next year,” even as the island spends $800 million more this year on fuel imports, Jayasundera said. Sri Lanka imports all of its oil.



“Agriculture and industry are both looking strong, and with foreign aid and the debt moratorium,” that is an achievable economic growth target, said Saman Kelegama, executive director at the Institute of Policy Studies in Colombo.



“But it will only be possible if the election doesn’t disturb the peak winter tourist arrivals or derail exports.” Sri Lanka is scheduled to hold its presidential election on November 17.



While high fuel costs are putting pressure on prices, Sri Lanka’s inflation rate will probably fall to between 9 percent and 10 percent this year, and drop to about 7 percent at the end of 2006, Jayasundera said.



The inflation rate slowed in September for the first time in 16 months, to 12.7 percent, from 12.8 percent in August, as the cost of foodstuffs declined.



The International Monetary Fund has said it expects Sri Lanka’s annual inflation rate to reach 14 percent this year, up from 7.9 percent last year, because of inflows of aid to help rebuilding. Sri Lanka should reduce fuel subsidies to manage its budget and debt obligations, the fund said last month.



“We will not reduce fuel subsidies quickly and sharply, as that would be destructive on industries currently in expansion mode,” said Jayasundera. “It will be done in a systematic manner and to balance during periods when agriculture supplies are strong.”

Sri Lanka will spend $400 million to build its first coal-fired power plant, as the government tries to cut fuel costs and meet electricity demand spurred by the cease-fire. The plant will produce 300 megawatts by 2010 and reduce generation costs by half that of oil-fired plants, which supply around 65 percent of the island’s electricity.



The government’s budget also will include plans to build a harbor in the southern town of Hambantota and to resurrect the construction of an expressway linking Colombo with the country’s international airport, Jayasundera said. Projects to rebuild roads destroyed by the tsunami will commence later this year, he said.



“We need to get three or four big projects off the ground to trigger private sector investment and transform the economy,” said Jayasundera.