Despite Tsunami, 5.5 percent growth forecast

UNCLAS COLOMBO 000421 SIPDIS DEPARTMENT FOR SA/INS, J. BRENNIG COMMERCE FOR C. CARNES TREASURY FOR A. BENAISA DEPARTMENT PLEASE PASS TO MCC: D. NASSIRY MANILA FOR USADB E.O 12958:N/A TAGS: ECON EAID CE ECONOMICS SUBJECT: Despite Tsunami, 5.5 percent growth forecast ¶1. Summary: The Central Bank of Sri Lanka expects the economy to grow by 5.5 percent in 2005 despite the extensive damage suffered in the tsunami. The bank is counting on key economic sectors and reconstruction activity to aid growth. The Central Bank forecast is higher than the post tsunami growth forecasts of the international financial institutions. End Summary ¶2. According to initial projections of the Central Bank, economic growth in 2005 would be around 5.5 percent compared with an original forecast of 6 percent. The Central Bank's post tsunami growth forecast is higher than the recent forecasts of the international financial institutions (IFI). A joint Asian Development Bank (ADB),World Bank (WB) and Japan Bank for International Cooperation (JBIC) damage and needs assessment report released in early February estimated GDP growth of around 5 percent in 2005 - with tourism and fisheries sectors declining by 30 percent and 35 percent respectively and construction sector growth increasing from 5 percent to 9 percent. According to the report, overall tsunami related losses are estimated at USD 1 billion (or 4.5 percent of GDP). In a separate assessment released in early January, the IMF cut its GDP growth forecast to 4 percent in 2005 from its previous forecast of 5 percent. Clarifying the higher Central Bank forecast, the Central Bank's Director of Economic Research, H.N. Thenuwara, told EconFSN that they expect a stronger recovery in tourism - leading to lower losses than predicted by the IFIs - and higher growth in the construction sector. Thenuwara acknowledged, however, that these are optimistic assumptions, and that the final numbers could be much closer to the IFI assumptions. ¶3. The Central Bank report said that relief, rehabilitation and reconstruction would help mitigate the negative impacts of the tsunami. All key sectors of the economy are showing signs of improving. Growth is expected to stem mainly from services (transport, storage and telecommunications). In addition, construction will be a major contributor, aided by post tsunami activity (Note: the construction sector is projected to almost double its growth rate in 2005 and as a sector, it accounts for almost twice as much GDP growth as tourism. End note). The agricultural sector is expected to perform well this year due to favorable weather. Textile and apparel exports are also expected to maintain solid performances. LUNSTEAD