INTERVIEW - War over, Sri Lanka hails return of diaspora cash

WASHINGTON (Reuters) - Sri Lanka’s government expects more capital inflow as the country’s diaspora returns to invest after the end of a 30-year civil war, the central bank governor said on Friday.

Sri Lankan Central Bank Governor Ajith Nivard Cabraal speaks during an interview with Reuters in Colombo February 23, 2010. REUTERS/Andrew Caballero-Reynolds/Files

“With political stability will come investment,” Governor Ajith Nivard Cabraal told Reuters.

“There will be investment that will come with tourism and infrastructure, but also there will be reinvestment by Sri Lankans themselves. That could be an important area for growth because the investment coming back could be the anchor for growth for next year and beyond.”

Sri Lanka’s civil war ended last May, and with it came an overflow of money wanting a piece of the current economic revival.

Sri Lanka’s stock market has returned more than 172 percent since it hit a trough at the end of 2008, spurred by the end of the conflict and a $2.6 billion International Monetary Fund loan that helped lift the country’s sovereign debt ratings.

Government debt prices and the rupee have also rallied on the IMF cash injection and the end of the war.

Sri Lanka’s economic expansion is likely to be more than the government’s 6.5 percent forecast this year, owing to rapid growth in infrastructure development and tourism.

“Estimates are likely to be revised to closer to 7 (percent) or even beyond 7 (percent),” Cabraal said.

Sri Lanka has been able to slow its inflation rate to 6.3 percent in March from a one-year high of 6.9 percent a month ago, Cabraal said.

“Sri Lanka has been a high inflation country for a long time. We have been able to bring inflation down to very reasonable numbers within the last year, and we are conscious that we have to maintain that,” he said.

“This gives a signal that we mean business as far as inflation is concerned, and we see the market reacting to that.”

Cabraal also said the next time the government sells a Eurobond it will likely be a 10-year tenor, in order to improve its yield curve. But at the same time, Colombo is encouraging the private sector to sell their own bonds.

“There are several companies that are just going beyond the $1 billion-mark, and there are other companies close to that,” he said.

“As Sri Lanka grows, there are many corporates that are possible contenders for global capital. It will be a good opportunity for foreign investors to invest in Sri Lanka.”

Any risk that the South Asian island may face, Cabraal said, would be external. “If there is a slow take-off of the world economies, particularly in Europe, it can have an impact on Sri Lanka.”

Editing by Padraic Cassidy and Dan Bases