Food, oil price rises worse than S.Lanka war

LONDON (Reuters) - High global food and fuel prices are damaging Sri Lanka’s economic growth more than its ongoing civil war, the central bank governor said on Tuesday, but shrugged off suggestions it could miss a 7 percent target.

The Asian Development Bank said earlier this month growth would probably slow to 6 percent this year and next on high interest rates and global economic weakness.

But governor Ajith Nivard Cabraal told Reuters rebuilding and new growth in areas of the island’s east recaptured from Tamil Tiger rebels last year would help keep growth at or near the target from 2007 6.8 percent.

“It should be 7 percent or about that,” he said in a telephone interview while on a visit to London. “Even with the war, 8 percent would be possible if it were not for the oil price and food price. I would say the growth was curtailed from the high oil and food prices much more than the war.”

The east would hopefully grow to provide one percent of gross domestic product from 0.25 percent now, he said. It would be by agriculture, fishing and the building of coal power plants including one on a former Tiger stronghold and ethnic Tamil settlement near the port of Trincomalee.

Sri Lanka’s annual inflation rate on a 12-month moving average hit 17.7 percent in March, its highest for five years, with consumer prices 23.8 percent up in March from a year earlier in contrast to a targeted 10 to 11 percent.

Cabraal said the target would be reachable if oil prices retreated to around $85-$90 a barrel, which was what the government had planned for. On Tuesday, they hit a new peak near $114 a barrel.

“We are only in the fourth month of the year and some analysts believe the price will come back down,” he said. “If it does then the targeted 10 to 11 percent is achievable. Otherwise, if it stays where it is now it will be very tough.”

He would not say what inflation would be if prices remained at current levels. Rocketing global food prices were also outside the government’s control, he said, although would at least benefit the island’s rural poor who were food producers.

He would not comment on whether rates should be further tightened, but said the central bank’s focus was on controlling inflation through money supply.

Sri Lanka’s $27 billion economy had some exposure to a global downturn, he said, but the key textile sector was likely to be more resilient than industries on which some other countries rely such as vehicle manufacturer or electronic goods.

Given global market conditions, he said Sri Lanka had no intentions of following last year’s Eurobond issue with another.

Cabraal said the Asian Development Bank’s predictions of a downturn were because they “did not have much information”, and blamed a ratings downgrade from agency Fitch on the fact they had been embarrassed to be caught out by giving good ratings to major Western banks that then hit trouble.

He said the island’s foreign direct investment was at its highest level ever at $450 million in the last year, coming from China, Asia, Australia and Europe amongst other places -- but with increasing volumes coming from emerging Asian economies.

Investors seemed largely unconcerned by the collapse of a 2002 ceasefire, he said, as well as a series of reports from human rights groups on worsening trends in abductions, torture and killings as the two-decade-old war resumed.

“In a conflict of this nature it is inevitable the stories are going around,” he said, saying any “hot-headed moments and excesses” were being investigated. “But we find those who are investing are doing it only on economic grounds. If you look at some other countries where there are lots of human rights violations they are attracting a lot of investment.”