Sri Lanka’s economy on upswing after war

Sri Lanka’s economic growth accelerated for the first time in four quarters as the end of the island’s 26-year civil war spurred reconstruction projects and increased consumer demand.

Gross domestic product expanded 2.1 per cent in the second quarter from a year earlier after gaining 1.5 per cent in the three months to March 31, the statistics department said in Colombo today.

Central Bank Governor Nivard Cabraal, who’s cut benchmark interest rates to a three-year low to support growth, said last month the $41 billion economy is on the “right track.” A $2.6bn International Monetary Fund loan approved in July and improved confidence after government troops defeated the separatist Tamil Tiger rebels in May have revived investment.

“Sentiment changed drastically with the end of the war boosting consumption and economic activity,” said Danushka Samarasinghe, research manager at Asia Securities Ltd. in Colombo. “Lower borrowing costs and slower export declines will add to the momentum in the second half.”

The Colombo-based central bank on September 11 lowered the reverse repurchase rate to 10.5 per cent from 11 per cent, the lowest since 2006. The repurchase rate was lowered to 8 per cent from 8.5 per cent.

The central bank in July raised its 2009 growth forecast to as much as 4.5 per cent from an earlier estimate of 2.5 per cent, citing increased investment and reconstruction projects. The IMF expects Sri Lanka’s economy to expand more than 3 per cent this year and accelerate in 2010.

Sri Lanka, which makes garments for Marks & Spencer Group Plc, Gap Inc. and Victoria’s Secret, is seeing a recovery in orders from the US and Europe, KD Ranasinghe, head of the central bank’s economic research department, said August 26.

Sri Lanka’s exports dropped 13.7 per cent in June from a year earlier, the smallest decline in three months.

The island’s services industry expanded 1.1 per cent in the second quarter from a year earlier, according to today’s report. Agriculture increased 4.4 per cent and industry grew 3 per cent.

The government declared victory over the Liberation Tigers of Tamil Eelam on May 16 after driving the rebels from their northern stronghold and killing their chief, Velupillai Prabhakaran. It plans to focus spending in the 2010 budget on rebuilding roads, schools and hospitals in areas formerly controlled by the LTTE.