Foreign inflows fuel Sri Lanka recovery

The strong economic activity in the three month period ending June showed Sri Lanka was on track to achieve a growth rate of 7.5 percent in calendar 2013, up from 6.4 percent in 2012, the Central Bank of Sri Lanka said.COLOMBO: Sri Lanka's economy grew 6.8 percent in the second quarter, up from 6.0 percent last year thanks to foreign cash inflows which helped a recovery, the central bank said Tuesday.

"Along with the normalisation of domestic economic activity, the expected recovery in the global economy would provide further impetus to the growth momentum of the economy," the bank said.

In its monthly policy review, the bank said foreign inflows from tourism, workers' remittances, foreign direct investments and foreign loans to local banks contributed to economic expansion.

"However, some volatility was observed in the domestic foreign exchange market recently, which could be attributed to the likely tapering of quantitative easing (QE) in the United States affecting emerging markets," the bank noted.

The bank, however, left policy interest rates unchanged since a 50 basis point cut in bench mark rates in May to encourage growth amid sluggish economic activity earlier this year.

"The downward movement of short term interest rates has begun to permeate to interest rates of longer term loans and this trend is expected to gather momentum over the coming months," the bank said.

The International Monetary Fund had warned Sri Lanka against interest rates reductions saying it could fuel inflation.

The central bank cut lending rates by 25 basis points in December and has since signalled it is ready to make further cuts this year.

Sri Lanka's economy recorded eight percent plus growth rates for two years running after security forces crushed Tamil Tiger rebels and declared an end to decades of ethnic war in May 2009.