COLOMBO: Tough economic times lie ahead for Sri Lanka as it grapples with an uncertain global climate and a ballooning trade deficit after posting record growth in 2011, the central bank said Monday.
The bank has already predicted lower growth of 7.2 percent for the tropical island nation in 2012, down from 8.3 percent in 2011.
New measures to hike interest rates, sharply depreciate the rupee and double import taxes in order to tackle the widening trade deficit will push up prices this year, the Central Bank of Sri Lanka warned in its annual report.
"These policy measures along with uncertain global developments are likely to have some adverse transient effect on economic growth and consumer price inflation in 2012," the bank said.
The island is heading for "moderation (in growth) and consolidation" in 2012 as authorities struggle to narrow the nearly $10 billion record trade deficit which has drained foreign reserves, the bank said.
Official figures showed that annual inflation in 2011 was 6.7 percent, up from 6.2 percent a year earlier. It is expected to be even higher in 2012.
Sri Lanka recorded an impressive 8.3 percent growth rate last year, up from 8.0 percent in 2010, the first full year after troops defeated Tamil separatist rebels in May 2009 and declared an end to nearly 40 years of fighting.
The bank said foreign direct investment in the post-war economy was $1 billion last year, nearly double the $516 million received in 2010, but below the country's potential.
"FDI inflows remain significantly below potential level and the country is yet to establish itself as a key destination for new FDIs," the bank said.
The investment climate must be made easier for foreigners to operate on the island, the bank said.
The economy was helped hugely by $5.1 billion sent home by Sri Lankan expatriate labour, up from $4.1 billion in 2010, the bank said. But it said the remittances were not sufficient to cover the huge trade deficit.
Fears of the balance-of-payments crisis spinning out of control prompted the government last week to revive an International Monetary Fund rescue package, suspended since last year.
The IMF released a $427-million instalment as part of a package negotiated in 2009. The $2.6-billion package is intended to rebuild Sri Lanka's foreign reserves.
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