Colombo: Sri Lanka lowered its forecast for economic expansion this year as higher interest rates curb spending at home and faltering global growth hurts exports.

Gross domestic product is set to rise 6.8 per cent in 2012, compared with an earlier estimate of 7.2 per cent, Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said by telephone from Colombo on Thursday. A drought has affected farm output, contributing to the cut in the projection, he said.

Growth weakened to a more than two-year low of 6.4 per cent last quarter after officials raised borrowing costs and let the rupee slide to damp demand for imports and pare a trade deficit. Sri Lanka’s overseas sales of items from garments to tea fell for a fifth straight month in July, exacerbating the slowdown in the $59 billion (Dh216.5 billion) economy.

“We had expected the Sri Lankan economy’s growth to weaken in the second quarter, reflecting the impact of the administrative measures, but the magnitude of the slowdown took us by surprise,” Kaushik Das, an economist at Deutsche Bank AG in Mumbai, said in a note before the release. “We expect growth momentum to deteriorate further in the subsequent quarters.”

Borrowing costs

The rupee is down about 12 per cent against the dollar this year. The benchmark Colombo All-Share Index has fallen 2.2 per cent in the period.

The monetary authority left borrowing costs unchanged for a fifth month in September after raising rates in February and April. Cabraal is trying to damp an inflation rate currently at 9.5 per cent.

Sri Lankan exports plunged 17.4 per cent in July, the biggest slump in three years. A moderation in imports helped narrow the trade gap to a 17-month low of $534.6 million, according to the central bank.

The government revamped economic policy this year to tackle the trade deficit after it pressured currency reserves. Stronger domestic demand following the end of a 26-year civil war in 2009 stoked the shortfall.

The International Monetary Fund has loaned Sri Lanka $2.6 billion to help rebuild the reserves. Cabraal said in July that the island is seeking support from the Washington-based lender for at least the next two years.