Sri Lanka sees cushion from India, diversification

By Paul Eckert, Asia Correspondent

WASHINGTON, May 28 (Reuters) - Sri Lanka's closer trade ties with neighbor India and value-added products like truck tires and flavored tea drinks should help it weather a global slowdown, Colombo's trade minister said on Wednesday.

Minister of Export Development and International Trade G.L. Peiris said a "double-whammy in terms of food prices and oil prices" had hit the Indian Ocean island country, which is looking for ways to make up for shortages.

Amid spiraling rice prices and a ban on exports by Asian suppliers, Sri Lanka received a special dispensation from India to keep imports of the grain coming, he said.

But Peiris said rising wheat flour and milk prices forced the country to look for ways to supplant imports.

"A small country like Sri Lanka, which is a net food importer, will have to really fall back on strategies for import substitution," he said in an interview with Reuters.

"Inflation is high in the country, that's inevitable, but we have achieved an impressive diversification of Sri Lanka's economy and that has enabled us to mitigate the consequences."

Peiris said Sri Lanka had sustained annual economic growth of 7 percent for the three years through 2007 and saw its exports grow by 15 percent last year.

A strong focus on adding value to Sri Lanka's output of commodities like rubber and tea resulted in ventures to make and export truck tires and diversification of the well-known Ceylon tea into flavored and herbal teas, he said.