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ASIAN ECONOMIC MONITOR SRI LANKA REPORT

Growth momentum to continue

ANN/THE ISLAND
Developments in all major sectors of the Sri Lankan economy indicate that growth momentum will continue in line with the 6 percent projection for the year.
First quarter growth stood at nearly 5 percent, while second quarter growth is projected at over 5 percent.
The government's policy statement and the medium-term macroeconomic framework annou-nced with the budget 2005 set out broad strategies to achieve macroeconomic stability and a regionally-balanced economic growth rate of 6 to 8 percent over the mediumterm.
Tsunami effect
The medium-term macroeconomic framework presented with the budget has been revised, taking into account the impact of relief, rehabilitation and reconstruction associ-
ated with the Dec 26, 2004 tsunami disaster.
Central Bank officials point out that economic growth would suffer this year albeit marginally, mainly due to the impact of the tsunami on the fisheries and tourism sectors. Increased rebuilding activities would compensate to some extent the loss of economic activities in fisheries and tourism.
Growth is expected to accelerate to more than 6 percent from 2006 onwards, spreading across all sectors and geographic regions.
A renewed emphasis is being placed on overcoming the energy crisis in the country by restructuring the energy sector and shifting to alternative low-cost sources.
Sri Lanka's external competitiveness depends crucially on the availability of low-cost energy, comparable with its competitor countries. Any further increase in oil prices could exert a heavy burden
on the economy and the people.
Increased globalism, competition
The global economy has already shown signs of slowing down and may threaten Sri Lanka's export performance.
The country's major export industry -- textile and garments -- is facing increased competition due to the phasing out of the Multi Fibre Arrangement (MFA) this year.
Any delay in the disbursement of pledged foreign assistance may further delay the urgent rehabilitation and reconstruction work, affecting the overall economic performance and the realisation of the expected fiscal consolidation in the medium term.
Growing sectors
The agriculture sector is recovering thanks to favourable weather conditions. Paddy production, which recorded an all-time high last year,
is expected to further increase.
Tea, rubber and coconut production is likely to improve further, while fish production is recovering gradually.
The industrial sector has shown a steady improvement, benefiting from strong external as well as domestic demand. The apparel industry will benefit further from concessions granted under the GSP+ scheme by the European Union.
The growth in the services sector is continuing with major subsectors such as port services, telecommunications, tourism and transport showing improved performances. The removal of Sri Lanka from the "war-risk" list is expected to further boost growth in port activities.
Balancing act
Thanks to a better trade balance, higher private remittances, the recovery of earnings from tourism, official inflows to the government and debt relief, official international
reserves have increased, giving greater stability to the domestic foreign exchange market. Gross official reserves increased to around US$2.37 billion by end-June from US$2.196 billion in end-December, 2004. Benefiting from these factors, the rupee has appreciated against the greenback by 4.5 percent so far this year.
Inflation has continued at a moderate clip due to improvements in supply, as well as the monetary policy actions taken so far.
Broad money growth remains at around 19 percent mainly due to the increase in credit to both the public and private sectors.
Export earnings for the first four months of this year increased by 11.8 percent, reflecting a better performance in industrial exports.