January 1, 2010 / 6:35 AM / 9 years ago

INTERVIEW-Sri Lanka to grow over 6 pct in 2010-cenbank chief

COLOMBO, Jan 1 (Reuters) - Sri Lanka’s economy should grow by more than 6 percent in 2010 as the end of the island’s long civil war boosts investor confidence, the central bank governor said on Friday.

“This year will a year of consolidation and of growth. The take off points would be tourism, transportation, fisheries, agriculture, and services. They will see clear growth potential.” Governor Ajith Nivard Cabraal told Reuters in an interview.

“We think 6-percent-plus growth is very manageable.”

The central bank and the International Monetary Fund have predicted the economy would grow 3.5 percent in 2009, its slowest pace in eight years.

The central bank cut policy rates six times to multi-year lows in 2009, hoping to encourage more private sector borrowing and spur the economy.

But now Cabraal said the central bank would take a cautious approach in relaxing key policy rates further.

“At the moment, we don’t think its right time (to relax). We think that we have done sufficient for the reaction to come from the market.”

Cabraal also said the central bank would aim to keep inflation contained at around 5 percent this year even as economic growth picks up.

The consumer price index rose rose to a nine-month high of 4.8 percent in December, up from 2.8 percent a month earlier.

CAUTIOUS RESERVES BUILDING

Cabraal said Sri Lanka would continue to cautiously rebuild reserves in 2010 even as the economy enjoys a growing “peace dividend” following the end of the country’s 25-year civil war last May.

The government had to seek assistance last year from the International Monetary Fund (IMF) for a $2.6 billion loan after its foreign currency reserves plummeted to an eight-year low of $1.27 billion by March due to global financial crisis.

The central bank has been buying U.S. dollars to build up the reserves while keeping the exchange rate steady since May. Reservers have now reached a record $5.2 billion as of Tuesday. “We have been cautious about building up reserves as they are costly to maintain with interest rates being very low.”

Sri Lanka also sought to diversify its reserves last year by buying gold and Cabraal said the central bank has now diversified the reserves in other major currencies as well.

“We are having gold because we want to have it at a time when other currencies have turmoil. We have a certain portion in dollars, a certain portion in yen, a certain portion in euro, a certain portion in pounds and a certain portion in gold.”

Foreign direct investment of $1 billion and around $3.5 billion of remittances have been targeted in 2010 to boost foreign inflows into the $40 billion economy, he said.

Cabraal also said the central bank may consider a longer term borrowing with the benchmark amount of $500 million this year, after selling its second $500 million sovereign bond in the international market last year at 7.4 percent, Cabraal said.

Sri Lanka’s benchmark 91-day treasury bill yield is at 7.73 percent, compared to 18.57 percent in early 2009.

“When we go to the market next time around, we would probably be able to take longer term money at competitive rates and we would want at least a benchmark. Maybe that’s possible, but right now I would think it is premature to think about it.” (Editing by Kim Coghill)

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