UPDATE 2-Sri Lanka drought may cut growth to 6.7 pct-Jayasundera

Last Updated: Fri, Sep 07, 2012 18:41 hrs

* Drought to curb economic growth

* Rupee may remain at current 130 level against U.S. dlr

* Inflation, interest rate may ease in Q1 2013 (Adds c.bank governor, background)

By Shihar Aneez and Ranga Sirilal

COLOMBO, Sept 6 (Reuters) - Sri Lanka's economic growth this year may range between 6.7 percent and 7.2 percent depending on the impact of a drought that has lasted since the beginning of the year, Treasury Secretary P.B. Jayasundera said on Thursday.

The central bank has forecast 7.2 percent economic growth this year, after revising it down in March from the original 8 percent. Growth last year was a record 8.3 percent.

"The economy is slowing down not because of global recession or anything. It is because of the drought," Jayasundera told a Reuters forum in Colombo.

He said he was optimistic about reaching this year's budget deficit target of 6.2 percent of gross domestic product against last year's figure of 6.9 percent.

He said year-on-year inflation, which eased to 9.5 percent in August from the previous month's 43-month high of 9.8 percent, should show further declines from the first quarter of 2013.

The economy, he said, will see the full benefit of this year's tough measures - including two interest rate rises to two-year highs and the introduction of a flexible exchange rate - by the first quarter of 2013 and interest rates would dip.

"By the first quarter, when we see the economy cooling for a full year, I see prospects, not necessarily for an easing of monetary policy, but for seeing a low interest rate in the country," he said.


The Sri Lankan rupee has depreciated more than 13 percent so far this year as the government switched to a flexible exchange rate policy in February.

Both the central bank and treasury have said macroeconomic fundamentals support a rupee level of 125 per dollar.

"Now it has stabilised around 130-131 level without central bank intervention. It may remain at that level," Jayasundera said.

The central bank spent nearly one-third of the country's foreign exchange reserves trying to prop up the rupee in the last four months of 2011 before moving to a flexible exchange rate in February.

The central bank has said it will consider concerns including those of importers and exporters when deciding where the exchange rate target should be, instead of allowing a market-led exchange rate.

"I am not a great fan of that advice," central bank Governor Ajith Nivard Cabraal said at the same event when talking about letting the market decide the exchange rate.

"I can tell you in Sri Lanka, we will be conscious of the market. But also we will be taking a long-term view on the market and we will also be supportive of the various stake-holders who we want to remain in our economy in the long term as well."

Despite repeated IMF call for a flexible exchange rate, the central bank resisted it until February after the global lender delayed a tranche of a $2.6 billion loan. However, after policy changes IMF the IMF resumed lending and completed it in July. (Editing by Stephen Nisbet)

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