Sri Lanka Economic Crisis - Dr. M. R. Mohamed Economist - Daily Ceylon on 24-08-2022

When A Central Bank Governor Speaks Like A Governor

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When a Governor speaks frankly, the market responds positively

When a Governor of a central bank speaks like a Governor, he is sure to receive two types of response. His candid speech will build private citizens’ confidence in central bank actions which in turn helps the Government in power to attain its growth objectives. But it could also anger his political masters if they are just concerned with short-term political gains and not about long-term sustainable economic achievements.

Governor Coomaraswamy in the hot seat for being frank and candid

This is exactly what has happened to the Central Bank Governor Indrajit Coomaraswamy who had spoken as the Governor of the Central Bank and not as a politician at the launch of the Central Bank’s Road Map for 2017 a few days ago.

He was praised by the private sector immediately as demonstrated by the supportive press statement issued by the country’s leading business chamber, the Ceylon Chamber of Commerce or CCC. Suspecting moves by the political authority of the day to interfere with the free decision-making process at the Central Bank, it has called the business community to support the Bank’s independence. But Finance Minister Ravi Karunanayake is reported to have expressed his anger at a subsequent media conference at certain insinuations made by Governor Coomaraswamy during his speech.

Unsustainable budget deficits are the cause of macro ailments

Governor Coomaraswamy’s speech in question was candid, objective and impassioned unlike the speeches made by his two immediate predecessors. It did not contain political camouflage, painting a rosy picture about the soundness of Sri Lanka’s economy. He said that Sri Lanka’s economy was sick, in the hospital but fortunately not in the intensive care unit or ICU. He did not blame only the present Government for the malady, but made a general remark that it was all the previous governments that had caused the economy to be hospitalised.

The Government’s policy action, he emphasised, should be proactive and free from short-term political expedience. Drawing the attention of his audience to the perennially worrying twin deficits – deficit on the budget and the deficit on the trade account – which have made the country’s macroeconomy unsustainable, Governor Coomaraswamy revealed a fundamental economic truth as follows: “Unsustainable budget deficits boost excess and untenable demand in the economy. When there is excess demand, it leads to inflationary pressures and higher nominal interest rates in the economy and there is also a higher propensity to import, given the limitations in domestic supply. That in turn, exerts pressure on the balance of payments and the exchange rate.”

Exchange rate depreciation cannot be prevented as long as the Government runs budget deficits

Consequently, the pressure for the exchange rate to depreciate cannot be prevented only through traditional monetary policy. The culprit is, therefore, the unsustainable budget deficits which the governments of the past have been religiously following, sacrificing the long-term sustainable development for short-term political expedience.

Economic reforms are a must

He thus emphasised that economic reforms are necessary but they should be consistent, guided by commitment and focussed on clear outcomes. What he meant by this is that reforms should not be selective, abandoned midway and done half-heartedly.

The cause for the pressure for prices to go up and exchange rate to depreciate had been the large fiscal deficits maintained by all successive governments since independence. The end of the civil conflict, according to Coomaraswamy, has created the best ground conditions for Sri Lanka to move on to a higher growth path. The responsibility of the Central Bank in this context has been to create facilitating conditions for both the private sector and the government sector to seize opportunities and elevate the economy to a high growth path. The country’s sick economy cannot be cured overnight, according to him, and it requires everyone concerned – citizens, politicians and bureaucrats – to take pains.

There must be consensus among politicians and all other stakeholders about the need for cohesive reforms aiming at improving productivity, competitiveness and the business environment. He expressed the wish that when the Government would restructure the Central Bank it would give more powers to the Monetary Board implying that it should give a greater independence to the Bank. According to Coomaraswamy, such moves “would enhance the credibility of the central bank, while preserving the independence it needs to play its roles efficiently”.

Both Governor Coomaraswamy and Minister Karunanayake are for disciplining the budget

Has Governor Coomaraswamy said anything that should anger Finance Minister Karunanayake? No, because the Minister himself has admitted in the past in his budget speeches as well as in public forums that there is an urgent need for consolidating the budget.

One example is the keynote address delivered by him at the Economic Summit organised by the Ceylon Chamber of Commerce in July 2016 in Colombo. He reaffirmed his commitment to consolidate the Budget meaning a number of reform measures being planned by the Government to discipline the budget that has gone astray. Those measures include increasing the revenue, reforming the tax structure, generating a surplus in the current account of the budget now known as the revenue account, reducing the budget deficit progressively and putting a check on the unsustainable growth in public debt.

This summit, attended by President Maithripala Sirisena too, was addressed by Governor Coomaraswamy also on the same line. Hence, this writer, who was a panellist at the forum, praised both the Finance Minister and the Governor for speaking the same language but warned that what is being done by the Minister of Finance should not go against what the Central Bank is doing. For instance, if the Central Bank has adopted a tight monetary policy measure to prevent the economy from getting overheated and thereby exploding eventually by way of continuously rising prices, the Minister of Finance should not loosen his budgetary expenditure programs by giving extra money to the hands of people. It would result in an unwelcome consequence in which the Central Bank would be forced to further tighten monetary policy to arrest the situation. The ultimate result will be that the country would get trapped in a vicious circle of ever increasing interest rates.

The reason for the dispute may be a power struggle

It, therefore, appears that the cause for the dispute has been that the Minister wishes to control the Central Bank just like another department of the Treasury and the Monetary Board led by Governor Coomaraswamy has resisted that move.

This is not a salutary development since both the Minister of Finance and the Central Bank should work together by coordinating the actions which they plan to implement. The Minister should appreciate that an independent central bank serves the Government better in its present drive for joining the rich country club within a single generation, the avowed goal of the present as well as the past governments.

Even a diehard socialist like Dr. N.M. Perera recognised this need when he was the Finance Minister during 1970-75. Addressing senior central bank officers in 1971, NM is reported to have said that the central bank should submit its reports without political colours and he would appreciate them only if they were dispassionate and objective. It would certainly behove the Government led by a liberal like Prime Minister Ranil Wickremesinghe to appreciate the wisdom so expressed by this socialist Finance Minister.

Erosion of Central Bank independence by the previous government

However, the developments that have taken place since 2005 have been to the contrary. The previous administration led by President Mahinda Rajapaksa had compromised the Central Bank’s independence continuously prompting the critics like Dr. Harsha de Silva, an independent economist at that time and a Deputy Minister in the present Government, to blast the Government and the central bank management.

Hence, when the new good governance Government was formed in 2015, all the expectations were that it would respect the central bank’s independence. In fact, the first economic policy statement delivered by Prime Minister Ranil Wickremesinghe in Parliament in November 2015 promised this. But the subsequent actions of his Finance Minister were to the contrary as highlighted by this writer in three previous articles in this series.

The first attempt by Minister of Finance to compromise central bank independence

In the first article published in August 2016 under the title ‘Be Warned! Monetary Board is losing its power as well as its independence’, this writer drew the attention of the Government to two unsavoury measures which the Minister of Finance had proposed which fell within the legitimate scope of the Central Bank.

One was the move by the Minister to introduce a national payments gateway outside the Central Bank; the other was a proposal to form an advisory group within the Ministry of Finance to address the solvency issues of banking institutions. Both these functions have been handed to the Central Bank by Parliament for valid reasons and the Minister of Finance cannot encroach into them at his discretion.

Attempts in Budget 2017 to take over certain central bank functions

The second article published in November 2016 reviewed the budget 2017 presented by Minister of Finance to Parliament and opined that the Budget was a forward measure if not for the proposals by which he had attempted to acquire the legitimate functions of the Central Bank.

There were seven such unsavoury interferences compromising the independence of the Monetary Board proposed by him in the Budget as described in the article under reference as follows:

“The Budget 2017 has also sought to encroach into the functions of the Monetary Board of the Central Bank of Sri Lanka by proposing certain proposals coming within the purview of the Monetary Board. This is against the objective of creating the Monetary Board and the Central Bank by Parliament in 1949. That objective was to allow an independent Monetary Board to manage the country’s monetary and financial systems, free from intervention of politicians or outside parties. These two functions are too precious to be left to the politicians who have personal agendas. Hence, the Monetary Law Act MLA made provisions to safeguard the position of Monetary Board members; once appointed by the President on the recommendation of the Minister of Finance and in consultation with the Constitutional Council, they cannot be removed while they hold office at the whims and fancies of the Minister of Finance. If he desires to do so, there is a specific procedure stipulated in MLA.

“Further, unlike the other public sector corporations and institutions in Sri Lanka, the Monetary Board is the only entity to which the Minister of Finance cannot issue general or specific directions. However, if there is a dispute between Monetary Board and the Minister with respect any particular desire of the latter, the Minister could still have his say being carried out by the Board by issuing a directive in writing to the Board in terms of section 162 of MLA. But, when he issues this directive, he has to inform the Board that the Government will take full responsibility of the consequences of carrying out that directive. This provision was used only on one occasion in Sri Lanka through the history of the Central Bank. That was when Prime Minister Wijayananda Dahanayake issued a directive to the Monetary Board to reduce interest rates in 1959 so that he could win the forthcoming Parliamentary elections. In the subsequent election, the Government took full responsibility for the consequences of reducing interest rates, because his government was thrown out and he himself lost his seat in Parliament. Hence, a Minister of Finance should not take this golden provision in MLA lightly.”

All these functions had been assigned to the Central Bank by Parliament by enacting special legislations and it was emphasised that the Minister should not seek to take them away from the Central Bank without going back to Parliament.

Civil society should help Central Bank to preserve its independence

The third article published in December 2016 under the title ‘ Reform the Central Bank but don’t erode its independence’ cautioned the Government that the way the Minister had proposed to reform the Bank would result in eroding its independence, an objective which the Prime Minister too had outlined previously when he presented his first economic policy statement a year ago. But the Minister or the Government does not appear to have taken these warnings seriously. Hence, it is up to civil society now, as had been voiced by CCC in the press statement quoted above, to come forward to defend the Central Bank. The Monetary Board or the Governor alone cannot do that job without such support.

Expressing professional views is not a sin

Governor Coomaraswamy cannot be faulted for expressing his professional views on the economy candidly and frankly. The Government led by Prime Minister Ranil Wickremesinghe will benefit immensely if it has the patience and wisdom to listen to this professional. (W.A. Wijewardena)

Central Bank Road Map-2017, Free download pdf, from here>>> 

https://issuu.com/m.r.mohamed/docs/cb-roadmap

More reading: http://www.dailymirror.lk/article/Central-Bank-unveils-monetary-and-financial-sector-policy-road-map-for-and-beyond-121676.html

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Economic Statement of Ranil Wickremesinghe

With regard to the current state of the economy and the Way Ahead, I would like to recall the speech I made in the House on the 05th of November 2015.

We can once again become the resplendent nation we were under Manawamma and Parakramabahu. But it is a path that must be pursued with determination, commitment and patience. Only then can we create the country that we can confidently pass on to the future generations.

At the time I made the statement last year, I affirmed that our collective economic journey requires revolutionary thinking, bold policies and initiatives that would transform Sri Lanka into a vibrant and prosperous nation. The National Government started work on a sound footing – by increasing the actual wages of the public sector including those of general workers. This process stimulated domestic demand and addressed the imbalance in income levels, the economic legacy inherited from the previous regime.

However, we acknowledge that much more needs to be done. We aim to enhance the income potential of Sri Lankans on a faster trajectory. During the last 60 years, Sri Lanka has not kept pace with the South-east Asian nations and has been only barely ahead of our South Asian neighbours. Doubling our current level of per capita national income from USD 4000 to USD is no magic trick – rather, it is setting in motion a planned effort to grow at a faster rate. If we continue to grow at our current rate of 5% per annum we will only double our personal income levels by 2033.

We can double our personal income levels by 2025 if we set in motion a growth rate of 7% per annum. This rate was achieved in the aftermath of the war in 2009 but the momentum brought on as a dividend of peace did not last.

In 2012, it went down below 5% per annum. Private businesses were nationalised while local and foreign investment dried up. Heavy state borrowing for economically non-viable state sponsored projects did not leave any funds for private investors to borrow from the banks.

In 2015, we have addressed the inequality in income distribution at a national level. Consequently, we have been able to uplift the income levels of low income earners and public officials. At the same time, tax levies are being imposed on affluent groups to fund higher wages and minimize government borrowing.

Along with The IMF, The World Bank and The Asian Development Bank, lending institutions of the US, Europe and Japan have expressed their willingness to lend Sri Lanka funds at considerably low rates of interest ; these funds would enhance and strengthen the economy. The last time such funds were made available was between 2001- 2004, when I was the Prime Minister. Today,

President Maithripala Sirisena and I have been able to successfully revive such funding sources towards assisting Sri Lanka.

For centuries, Sri Lanka’s location in the heart of the Indian Ocean between Western and Eastern Asia has made us active partners of inter-regional trade. The strategic importance of Sri Lanka as an Indian Ocean hub in the realm of global logistics and commercial activities has been widely acknowledged.

In this context, the foundation for a more sustainable economic model has been laid already, enabling us to recover from the inward looking economic policies of the past. Our exports with a value of USD 11 billion are contracting while garment exports remain static at USD 5 billion per annum. The garment industry will see a revival when GSP+ returns – we have already set in motion the process towards it being obtained once again.

Agricultural exports have declined as a result of prices for tea and rubber slowing down. It must be noted that in the plantations sector, some of the companies are being run well while others not so.

The Government plans to restructure the regional plantations companies by infusing new capital and introducing efficient enterprises.

Our export base has remained the same for over 30 years and is dependant on a narrow export base of garments, tea, rubber, gemstones and tourism. The economy cannot experience growth based on such limited exports.

A key economic contribution in the form of remittances from the Middle East remain volatile as oil prices fall and countries like Saudi Arabia are reducing the salaries of their own citizens. This will pose a new challenge to Sri Lankans employed in the Middle East.

As the global economy struggles to recover, Sri Lanka has been able to successfully navigate amidst changing economic dynamics, maintaining a prudent domestic economic level of growth.

The Government has encouraged the people living abroad and in Sri Lanka to invest in construction, which has resulted in a construction boom.

Sri Lanka is seeing a staggering growth in tourist arrivals as our image as a safe and a friendly tourist destination is growing rapidly. In the aftermath of a decade of neglecting markets, major international airlines and hotel chains are once more entering a vibrant Sri Lankan market.

We are now ready to enter the next and the most important phase of economic activity, that of creating new and productive jobs and livelihood for the young people. The creation of 1 million jobs will empower the youth and enhance their standard of living.

We need to sustain a higher rate of growth for the plans to succeed , one that will result in higher exports and a greater domestic demand. Such growth will also increase state revenue. As I mentioned last year, a drop in government revenue and an increase in commercial debt to its upper limits can have a drag effect on the economic development.

Achieving a high level of growth in exports need major capital infusion and greater investments. New technological innovations, better management of data systems and up-to-date market information systems are needed to achieve better results.

During the Eighties, having decided that outsourcing was a better option, Japan was reviewing moving operations to Thailand and Sri Lanka. The Japanese delegation to Sri Lanka arrived at the height of July 1983 riots and needless to say, we lost the opportunity to Thailand which obtained investments to the value of 50 Billion USD. There was a spillover of US Dollars 13 Billion into Malaysia as well.

As the then Minister of Industries I focused on promoting industrialisation. At the time, Vietnam has opened up as a market economy model and came to Sri Lanka for advise. Unfortunately, as the war progressed, we stopped pursuing industrialisation in 1997. Vietnam continued to engage in industrialisation.

Sri Lanka’s total export stood at US Dollars 1.9 Billion in 1990. Vietnam’s exports were worth US Dollars 2.4 Billion. Today, 25 years later, Sri Lankan exports have climbed to US Dollars 10 Billion while Vietnam retains exports valued at US Dollars 162 Billion, most of it based on manufacturing.

In 2003, as the then Prime Minister, I set in motion the application process for GSP+ , subsequently concluded by President Chandrika Kumaratunga. While Bangladesh also enjoyed concessional entry into the EU markets, Sri Lanka lost the GSP+ incentive in 2010.

In 2003, the Textile and Garment sector in Sri Lanka stood at US Dollars 2.5 Billion, while in Bangladesh, it was US Dollars 5.2 billion. Last year our exports went up to US Dollars 4.8 Billion while Bangladesh stood at US Dollars 26.6 Billion.

We must understand that in order to grow out of being a poor, backward country, we need to focus on large scale FDIs and accelerate growth.

Towards this direction, the Government plans to create a positive investment climate that will generate jobs. Hurdles that stand in the way of achieving growth for business start-ups will be removed. The processes of starting a business, getting construction permits, electricity connections and bank credit, registering property, protecting minority investors, the payment of taxes, trading across borders, the enforcement of contracts, the resolution of insolvency, and regulations governing labour market will be efficient mechanisms that will facilitate business growth. Additionally, the Government will also prepare legislations to establish a single window for investment approval. Further, we will hold discussions with the Trade Unions and relevant stakeholders. The targeted outcome is to bring Sri Lanka within the top 70 nations of the Doing Business Index by 2020.

We plan to build on these strengths and initiate plans for a logistical and business centre in the Indian Ocean. With this in mind, we have started developmental work on 3 international ports and airports, providing efficient connectivity within the region.

A new set of investment incentives based on Capital Allowances and low tax regime will be introduced; the details will be announced in the Budget

We plan to repeal The Export and Import Control Act and bring in new legislation on the lines of Singapore’s (a) Regulation of Imports and Exports Act and (b) Strategic Goods Control Act.
Current domestic market enterprises also have a greater role to strengthen the economy – in addition to expected Direct Investments of local and foreign origin. They too can add to export volume.

The Government will assist them to connect to the Global Value Chain by introducing a Trade Adjustment Package which will include Capital Allowance for new equipment.

Concurrently, we are reviewing the growing interest of local and foreign business concerns towards solving the twin problems of low private investment and the accumulation of vast debts by the Government.

As you are aware, during the last year, HE the President Maithripala Sirisena and I have travelled to key destinations with an objective of reviving the interest in Sri Lanka. We have met with success.

During my recent visit to Brussels, the officials of the European Commission expressed their confidence that the GSP Plus trade concession would be given favourable consideration. The Japanese Prime Minister has also appointed a senior official to especially coordinate Japanese Sri Lanka Joint Comprehensive Partnership Programme.

Towards creating newer markets for our exports, we are also negotiating three trade agreements; ETCA with India, and two FTAs with China and Singapore.

These are significant developments even as these two large economic regions struggle to maintain economic momentum in their domestic markets, which have been traditional export destinations for our businesses.

Most of us thought that our next generations would have to pay the debts incurred for Hambantota port and Mattala airport. Now, we have entered into a debt to equity swap. Chinese investors have made significant commitments to invest equity in the debt strapped Hambantota Port and the Mattala Airport as PPP ventures.

The Government plans to receive sufficient funds to offset these debts. You can now be assured that your children will not have to pay these debts but can reap the benefits of a dynamic, international air-sea hub.

Strong interest in utilizing these zones along with other such zones in the western province have been noted by investors from China, Korea and Japan. They plan to create an export market focused on Europe, China, Japan and USA and the crescent of markets around the Indian Ocean. Between the Middle East, Iran, Afghanistan, Pakistan, India, Bangladesh, Myanmar, Thailand, Malaysia, Singapore and Indonesia there exists a fast-growing population currently of over 2 billion people. This combined market has the potential of 3 billion consumers by 2050.

Going forward, our development strategy will be aimed at capturing trading opportunities within these identified Indian Ocean markets via pursuing trade liberalisation agreements with their governments. Concurrently, we are focusing on defining the two development corridors across the country – this will be a focal area for investment by the public and the private sector.

The logistical and infrastructural facilities that provide faster, secure links to the global value chain empowering viable business ventures, will be spearheaded for the first time in Sri Lanka, in these development corridors.

The two development corridors will correspond to the two distinct halves of the country irrigated by the two monsoons. The South-Western corridor will have as its major axis the proposed Kandy-Colombo highway linked to the existing Southern highway. This region has the strongest potential to link up with global value chains, because of its close proximity to the Katunayake airport and the Colombo harbour. This project envisages creating a Megapolis Development Authority to develop the entirety of the Western Megapolis an urban area of over 8 ½ million people.

A brand new financial city centre that will be based at the new reclaimed land development project alongside the Port of Colombo.

A sub-corridor that will stretch along the central highlands from Kandy via Nuwara Eliya to Badulla and linked to the Kandy-Colombo highway. This will connect the revitalized plantations economy and modernized agricultural pursuits and will also lay emphasis on tourism and service delivery initiatives.

The second North-Eastern development corridor will connect the Eastern Province and the North Central Province to Jaffna linking the Trincomalee Port City to the Rajarata. The completion of the Moragahakanda and the Malwatu Oya reservoirs will create new vistas for the country and will result in the region gaining more land for agriculture. It will further result in the historic cities of Polonnaruwa and Anuradhapura emerging as modern urban centres. Trincomalee will be urbanized and transformed into a world-class Port City.

Reconstruction of housing and civic infrastructure will be given highest priority within the previously war-affected areas around Jaffna, Mullaitivu and Kilinochchi.

SUSTAINABLE DEVELOPMENT

While the priority remains economic stimulation and the improvement of individual finances, the plan also focuses on establishing a society in which every citizen has access to equal opportunities and individual rights are safeguarded – this includes the right to shelter. The Rural Housing Loan Programme, Urban Regeneration Housing Programme, Estate Housing Programme and Resettlement Programme are being implemented with focus on vulnerable groups. Plans are underway to construct 500,000 housing facilities for the middle-class to meet the rising demand for housing in urban and suburban areas, 65,000 houses for the urban underserved population, 65,000 houses for internally-displaced people in areas previously affected by conflict, and to fulfill 65% of the estate housing requirement by 2020.

I must emphasise at this juncture that we are committed to the sustainable development goals adopted by the UN General Assembly in September 2015. Our development of industry, services and agriculture will be guided by these principles. For instance, when we develop 15,000 acres of free trade zones in the South, we will undertake reforestation of unutilised lands in other parts of the country. Similarly, we are finding solutions to the overwhelming problem of solid waste disposal in our major cities. This is a hazardous situation affecting the lives of thousands of people , one left unchecked by the last government.

We are going ahead with schemes that provide safe drinking water to the communities in need of such projects around the island ; we are also seeking to improve treatment of waste water. The pristine status of our natural environment remains our most precious resource and has been praised by visitors throughout the centuries. We pledge to take utmost care to preserve our natural resources and our heritage within all our development efforts. The economic vision of the National Government will yield prosperity for all Sri Lankans. It is an economy that will share the benefits of development among all. One that will be friendly to all, beneficial to all, keeping its focus on including sustainable development as well.

What we are hoping for is a lawful economic environment that will set the stage for sustainable development. We will incorporate a sustainable development entity that will provide the necessary framework and initiate mechanisms required. I called this the third generation of economic reforms. The first generation was introduced by President Jayewardene, the second by President Premadasa. What is now envisioned by us here, is based on multifaceted economic linkages to global supply chains and the planned increase in trade development. Many qualified people prefer well-paying jobs that are given based on professional capabilities. It is not viable to maintain a low paying production based economy.

These developments will result in the creation of one million jobs and the expansion of the middle-class; a nation in which the farmers prosper and every child has access to education. Our end goal is prosperity for everyone. Every citizen must enjoy the benefits of living in a wealthier nation. This also includes the realization of the basic rights of every citizen – principally, housing. We view this as the first step towards ensuring total social inclusion, followed by measures to promote inclusive involvement in the economy, especially for women, while improving facilities for differently-abled persons to integrate into society and pursue their life goals with normalcy.

BUSINESS AND SECTORIAL PRIORITIES

Sri Lanka has evolved a variety of distinct economic sectors, which are capable of further integrating the country’s economy into the Global Value Chain. The digital economy, tourism and commercial agriculture are coming of age concerning their potential to offer high-value skills and remuneration to young job seekers in the country. With the new economic orientation that will include fewer opportunities with the government and more exposure and opportunities for entrepreneurs and skilled professionals, we aim to accelerate the broad basing of opportunities in these segments – the digital economy, tourism and commercial agriculture.

THE DIGITAL ECONOMY

The digital economy will empower our nation – through providing affordable and secure Internet connectivity to every citizen in any part of Sri Lanka, removing barriers for cross-border international trade. A platform for cashless payments will also be created. Digital technology will be included as a new subject in the school curriculum. We plan to foster entrepreneurship opportunities in digital commerce while providing training in cyber security monitoring and response.

MODERN MANUFACTURING ECONOMY

We shall strive to attain the status of a modern manufacturing economy that will include state-of-the-art equipment.

We plan to overcome the bottleneck of being a middle-income country with low wages in our pursuit towards greater prosperity for our people.

STATE-OWNED ENTERPRISE (SOE) REFORMS

We will establish a Public Commercial Enterprise Board by law an organization that will manage SOEs enabling them to be more efficiently run on a commercial basis ensuring value for money. We are creating a Public Wealth Trust through which the shares in state-owned entrepreneur enterprises will be held in trust for the people.

FINANCIAL INCLUSION

With the passage of the Microfinance legislation in Parliament early this year, rural microfinance is now a legitimate activity. Urgent measures are being undertaken to link foreign microfinance providers with local communities to promote greater credit penetration in rural areas. The Ministry has already allocated five billion Rupees for a special SME financing scheme to empower business formation and development. A National Financial Inclusion Policy will be evolved by the Central Bank to set quantitative targets for opening of accounts, disbursement of SME loans etc. To enable this, we will be consolidating rural development banks (RDBs). Rural Development Banks have become the main channel for concessional lending to Small and Medium Enterprises. Their decentralized management structure is reinforced with the Central Bank of Sri Lanka, through its newly created regional departments. We seek to initiate a nationwide campaign to encourage banking and endow a spirit of entrepreneurship among all.

TOURISM

The plan to make Sri Lanka a high value destination is on the cards. It will herald in prosperity that will showcase our cultural pursuits, wild life and the environment via provinces developed as unique tourist hot spots. We believe that Sri Lanka will be one of the finest travel experiences for the global traveller.

MODERNIZING AGRICULTURE AND FISHERIES

It takes over a decade to modernize the sectors of agriculture and fisheries. We plan to establish a Rural Modernization Board, which will include all stakeholders. Fisheries and Poultry will be the first categories to be promoted for exports.

The difficulties faced in the tea and rubber industry will be reviewed. The Government will restructure the plantations sector to invite new capital and eliminate inefficiency.

NATIONAL AGRICULTURAL MARKETING AUTHORITY

Marketing of agricultural products is the most important link between the producer and consumers. We will establish a fully empowered National Agricultural Marketing Authority to coordinate the marketing of agricultural products, and develop existing markets, transport and storage facilities. In addition, new infrastructure facilities such as cool storage will be added at a divisional and regional level, for preservation of food before or after purchase. Providing large storage facilities for purchasing and storage during the harvesting season is an essential pre-requisite for implementing a guaranteed purchase price. It is planned to create 250 ‘polas’, farmer markets island-wide for farmers to bring their produce to local markets.

UPDGRADING HUMAN CAPITAL

The country’s current education system, particularly the higher education system, is being recalibrated to produce graduates who will meet the skill and knowledge requirements of the corporate sector. We will ensure a culture where job-oriented skill development will take precedence over the passing of exams, while introducing more real-life vocational situations and simulations to the curriculum.

INCREASING FEMALE PARTICIPATION IN THE ECONOMY AND GOVERNANCE

The Government is committed to creating good and safe working conditions through sufficient investments and promoting entrepreneurship to create quality and high paid jobs in the country while targeting to increase the female labour force participation rate to 40% by 2020. It is also acknowledged that female-operated Small and Medium Enterprises (SMEs) could well cater to the demands of the rising middle class, which is important to Sri Lanka now given the country’s move towards an upper middle-income economy. The Act has reserved 25% of representation for women in local authorities.

RECREATIONAL INFRASTRUCTURE

In addition to the recreational parks developed around the country, life enrichment projects are underway to introduce recreational spaces in every province, complete with synthetic athletic tracks and Olympic-sized swimming pools.

EDUCATION

13 YEARS OF COMPULSORY EDUCATION

A fresh policy initiative for making 13 years of education mandatory is now in place.

A pilot project on providing 13 years of mandatory education will commence next year. Those who do not pursue higher education after O/Ls will be trained under an upper Secondary Vocational Education system. We will recruit teachers and instructors required for this purpose as well as enhance the additional number of teachers needed to fill the cadre requirements for the next three years. Our focus will be on ensuring that there will be no teacher shortages by 2019 and ensure all schools will have complete cadre. We will bring in a law for providing separate cadre for every school.

We will also commence school inspectorate to ensure that high quality levels are maintained in teaching. School boards consisting of parents, staff and past pupils will work towards maintaining high standards.

We will also commence a pilot programme to provide tablet PCs to all post O/L students.

Development of school infrastructure will be given to those needing to build capacity for new intake of students.

PROMOTION OF PRE-SCHOOLS AND DAY-CARE CENTRES

A five-year programme focusing on early child development (ECD) has been launched for improvement of systems and quality, to enhance the overall effectiveness and increase the enrolment of children for ECD programs. Early childhood development is not only meant for pre-school education, but includes interrelated segments such as health, nutrition, psychological condition, child care, probation and protection which are also essential components that will be considered in ECD.

EMPLOYMENT

In order to overcome the mismatch between skills acquisition and employment, we plan to empower young people without skills needed for employment, by providing them with additional training opportunities.

We will pool the services of Government and private sectors and utilize the Government network of state affiliated training institutions for this purpose. The accelerated Training and Employment programme will be a Public Private Partnership. The Government will make funds available both for training as well as supplementing the income of trainees in the Private Sector. This scheme will start in 2017 and will be fully operational in 2018.

HOUSING

The Government plans to construct 500,000 housing units for middle class and the working class, which will give them house ownership at a subsidized rate. These will be in the form of successful private-public partnerships and will be private sector driven. These will be based around vital nerve centres such as emerging cities, while encouraging the concept of sustainable urbanization; thereby strengthening the Government’s socio-economic pursuits and sustainable development goals.

The Budget proposal will include detailed information on these initiatives.

Today, what the economy needs is not more governance but to achieve a goal of prosperity that can happen via the liberation of the economy. The first generation of economic reforms introduced in 1978 set the country free from the ill effects of a closed economy. Today before us is the challenge of introducing the third generation of economic reforms. We have the potential to become Asia’s next economic success story if only we can face those challenges successfully.

A booklet that contains detailed information on the planned economic measures will be made available soon.

Mr. Speaker,

In the past, Sri Lanka has missed many opportunities to achieve truly viable economic success. We cannot let the opportunity before us slip once again. That’s why we must be able to comprehend the current global conditions and make the best use of our strengths, utilizing it successfully towards emerging an economically robust nation.

All of us may have personal opinions and different political affiliations but we as a nation must be able to rise above it all, to come together to take our country forward.

We have the best opportunity for that under the National Government.

We cannot hold the past accountable for not going forward into the future. There’s no use in shedding tears over the wrong economic pursuits of the past. Instead, we need to focus on the path forward, on our ability to compete successfully in a dynamic global market place and carve out our niche among the prosperous nations of the world.

The future generations will depend on us for choosing the right economic path. As a nation committed to sustainable development and success, only then can Sri Lankans become the empowered citizens of an economically sound nation. (Colombo Telegraph)

PRIME MINISTER’S ECONOMIC STATEMENT IN PARLIAMENT ON 27TH OCTOBER 2016

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Sri Lanka Fiscal Reforms: An Imperative For Sustained Growth

Above 7% growth is needed to sustain the economy

Sustained growth is normally viewed from two different angles today. One is from the point of environment and depletion of non-renewable resources. The other is from the point of a country’s ability to sustain a high economic growth based on technological advancement, infrastructure and quality of human capital. Economic growth involves the delivery of an ever increasing high volume of material goods and services to people.

It requires an economy to transform natural resources into final goods and services by using a combination of technology, physical capital and human resources. If the rate of annual expansion of the volume of goods and services, known as real GDP, is above 7% for a significantly long period, that economy is hailed as a high growth achiever on a sustainable basis. There is a reason for using the benchmark growth rate of 7% as the minimum. This is because GDP will double roughly in every 10-year period, if growth occurs at 7% annually at a compound rate. Thus, at this growth rate, within 30 years or in a single generation, Sri Lanka will be elevated to the rich country club. The sustainability path so marked at a growth of 7% is interrupted, if the growth rate becomes volatile and falls below the minimum level for many years. A country desirous of attaining sustained growth has to take appropriate policies to avoid this possibility.

Environmental issues should be tackled at global level

Environmental issues and their consequential global as well as local manifestations eroding the welfare levels of people are in the forefront of economic policy discussion and global action today. Since it is akin to the financing and production of a global public good, it needs to be addressed by consensual global action reinforced by supportive local policies.

The global community is far away from reaching agreement on such a consensual action program. Hence, in the meantime, the most pressing problem faced by emerging economies like Sri Lanka is the elevation of the respective economies to a high growth path that would eventually uplift the welfare level of the peoples of those countries. Therefore, this address will look at how fiscal reforms are imperative for the attainment of the second aspect of sustainable growth, namely, the continuous expansion of the material goods and services produced within an economy.

A volatile growth below 5% on average

Sri Lanka’s growth numbers show, as presented in the graph, a high level of volatility since independence. From 1951-2015, the country’s growth rate has been on average at 4.7%. In this long 65-year period, spikes representing growth rates of above 7% have been recorded only in six years. Even then, they are a way apart from each other except for a brief period during 2010-2012. All others have mostly been troughs below 5%. Thus, Sri Lanka’s material growth has not been a sustainable one posing the serious challenge of lifting the economy to a continuous high growth path.

This poor achievement has been made by the country despite the avowed goal of all the governments to make it a rich country within a single generation. That goal has been elusive moving away from Sri Lanka every time it tries to reach it. The problem has become more complicated as some empirical studies have shown such as the joint study done by IMF researchers and a local economist that the country’s actual growth initiatives have been above its potential growth.

The implication is that the growth has been attempted through expansionary fiscal and monetary policies raising the aggregate demand above the aggregate supply causing an overheating in the economy.

The outcome has been manifested by above average inflation within the domestic economy increasing the cost of production and thereby eroding the country’s competitiveness, on one hand, and putting pressure for the exchange rate to depreciate against other major currencies, on the other. Thus, how to generate a sustained growth has been the most pressing development challenge which the country is facing today.

A bad track record in fiscal policy

Sri Lanka’s past fiscal policy has a very poor track record. Ministers of Finance come up with budgets with ambitious fiscal targets, hail their products as ‘development budgets’ and spend more time in criticising their predecessors instead of proposing strategies for the future.

Private sector chambers too join Finance Ministers in calling those budgets development oriented and business friendly just by looking at the handouts delivered to them. However, there is no mid-term or year-end review of budgetary achievements, though it is now a requirement under the Fiscal Management (Responsibility) Act enacted in 2003.

Though these reports are published as required, they seldom conform to the requirement of presenting analyses of achievements against targets and why such targets have not been achieved, if they have failed to attain them. There is no ex post review of the budgetary achievements against the targets so that the Ministers of Finance could rectify the mistakes they have made.

Budgeting is a process which requires continuous review, identification of deviations and making amendments to current strategies to address those deviations. If this process is not followed, the fiscal situation of the country begins to deteriorate year after year, reaching a situation where the country is unable to improve the conditions without making sacrifices on a massive scale or getting external support. Today, Sri Lanka’s fiscal situation is exactly in this condition.

Problems in the fiscal sector

Sri Lanka’s weak government sector is rubbing its inefficiency on all the sectors in the economy. It is conventional to name the private sector as the ‘engine of growth’. If so, the engine should have a driver and that ‘driver’ is none other than the government sector. If the driver is inefficient and incompetent, the engine cannot move. The responsibility for making the engine driver efficient and competent devolves on the fiscal policy. It requires the government to adopt a host of policies.

First, it has to prune the government sector which has grown beyond the country’s carrying capacity. Second, it has to decide on its priorities carefully allocating funds for future growth generating sectors.

Third, it has to reform the loss making public enterprises so that they would not be a burden to taxpayers. Fourth, the Government has to improve its revenue base so that it would be able to finance its ever-growing expenditure through revenues generated from taxes, profits and other sources.

Fifth, it has to put a stop to unnecessary expenditure programs that have become a drain of the scarce resources of the Government. Sixth, the budget has to be consolidated to reduce the ever-increasing public debt driving the country to an inescapable debt trap.

Seventh, waste, corruption, and profligacy in expenditure have to be eliminated promoting thrift at every level. Eighth, the current fiscal crisis should be recognised, communicated effectively to the electorate, and the painful measures waiting for the people should be properly marketed.

Past advice not heeded to

These issues have been discussed, analysed and debated at various public forums in the past. To its credit, the themes of most of the previous annual sessions of the Sri Lanka Economic Association had covered these issues. The Presidential Addresses made by the SLEA President, Professor A.D.V. de S Indraratne from 2004 to 2014 at those annual sessions and now released as a book under the title ‘Policy Issues for Sustained Development in Sri Lanka’ have critically analysed those issues.

In addition, the Institute of Policy Studies too has analysed these issues in its annual publication, The State of the Economy, which is normally released prior to the Budget Speech by the Minister of Finance. Hence, I will focus in this keynote a few salient issues that need be addressed urgently.

Heading toward a debt crisis

One issue is Sri Lanka’s high public debt levels that have eaten up almost the entirety of the Government revenue for servicing the same. The recorded public debt as a percent of GDP has declined from above 100% in early 2000s to a level of around 72% over the last five-year period.

Apparently, this shows an improvement but behind this improvement, there are a lot more to be reckoned with. Sri Lanka’s commercial external debt is rising, posing problems for future debt sustainability. A recently made charge in this connection has been that the total indebtedness of the public sector has not been recorded in the government debt office which records only the borrowings of the central government. Thus, it is charged that it has left out a large segment of borrowings by public sector institutions.

Most of this extra-Treasury debt has been raised on the strength of guarantees issued by the Government and therefore if the public sector entities fail to repay, a contingency liability will fall on the Treasury to honour the same. The problem has been further complicated by the use of the commercial external debt raised at high costs for unproductive infrastructure projects without proper cost-benefit analyses or viable business plans. Hence, the burden of maintaining such unproductive infrastructure projects as well as servicing such debt has fallen to the country’s taxpayers.

Loss-making SOEs

Another salient issue has been how the loss-making public enterprises could be turned around to enable them to contribute to the public coffers. The leading loss-makers in the past decade have been SriLankan Airlines, Mihin Air, CEB, CPC, CWE and CTB.

The annual losses of these five public enterprises have been more than Rs. 100 billion. The implication of such loss-making for the budget has been that its scarce resources have to be used to keep them going. Since the annual running cost of a mid-size university is about Rs. 2.5 billion, these loss-makers have forced the nation to sacrifice about 40 mid-size universities.

The Ministry of Finance had emphasised in the past that public enterprises should deliver an adequate return to the Treasury on the investments it has made. However, no concrete action was initiated by the Ministry to force these enterprises to deliver positive returns. There is an initiative made by the present Government to restructure the loss-making public enterprises. Yet, the progress has been slow and in the interim, the Treasury has been forced to fund their losses so that they could keep their balance sheets clean and continue to borrow from commercial banks.

One mistake made by the present Government is the decision to amalgamate two sick persons, SriLankan Airlines and Mihin Air as from the beginning of November, 2016. Since both are sick, the Treasury will have to pump money to keep both sick persons going. It will increase the taxpayers’ liability rather than easing the same.

Friction between monetary and fiscal policies

A third, perhaps very important, issue has been the non-coordination between the fiscal policy adopted by the Ministry of Finance and the monetary policy adopted by the Central Bank. Thus, when the Central Bank tightens monetary policy to fight inflation, the Ministry of Finance introduces measures which weaken the Central Bank’s action.

A good example was the tightening of the monetary policy by the Central Bank in July 2016 by increasing its policy rates by half a percent. The objective of this measure had been to curtail the expansion of the aggregate demand above the aggregate supply and thereby causing inflation and bringing pressure for the exchange rate to depreciate. Almost immediately, the Ministry of Finance announced the granting of the duty free car importation facility to public servants stimulating the demand and negating the action taken by the Central Bank.

Unwarranted bailouts

A fourth area of concern is the bailing out of the fraud-stricken bankrupt financial institutions by using public funds or Central Bank’s money printing ability.

One example is the money made available by the Treasury amounting to Rs. 4 billion to pay out to the alleged depositors of the bankrupt credit card operator, the Golden Key Company.

Neither the Government nor the Central Bank has an obligation to do so since it is a company that operated illegally as a deposit-taker. Then, last week, the Central Bank has outdone the Government by making available a sum of Rs. 16.5 billion to bail out a bankrupt primary dealer and three finance companies.

Solving Entrust issue without legal provisions

The primary dealer, Entrust Securities, has reportedly defrauded investors who have paid that company to buy government securities on their behalf. The amount involved has been estimated at Rs. 12 billion. The Bank has proposed to lend Rs. 8 billion to a Special Purpose Vehicle managed by Seylan Bank to enable the manager to accumulate interest for eight years by investing the same in a government security and pay the investors out of the interest income so earned.

SPV is required to return the original Rs. 8 billion to the Bank at the end of the eight-year period. This lending is against the Monetary Law Act or MLA which has authorised the Monetary Board to lend only to commercial banks and NSB for meeting liquidity shortfalls against the collateral of prescribed securities, only for a period at the maximum of nine months. This restriction has been introduced to prevent the Board from lending to others causing inflation, on the one hand, and leading to frauds, on the other.

Hence, the Board is exposed to possible criminal liability charges in the future. In this scenario, it is advisable that the Monetary Board re-examine this proposal before its implementation.

Opening Pandora’s Box

The three finance companies involved have been Standard Credit Finance, City Finance Corporation and the Central Investment and Finance. The Bank is expected to make out these payments out of its deposit insurance fund or DIF which has sufficient resources at present. But given the liability which will fall on it on account of other sick financial institutions, it is questionable whether this measure adopted by the Board is prudent.

Further, the Bank has opened Pandora’s Box by using its money printing machinery and funds in DIF to bail them out since it creates a bad precedent for future would-be-defaulting financial institutions. It appears that its implication on the Budget has not been properly assessed by the Ministry of Finance. These bailouts reduce the Central Bank’s transferrable profits to the Government which the Budget 2016 had estimated at Rs. 13 billion in each of the years from 2016-2019. Since the Central Bank had made losses in 2015, it could not deliver the amount earmarked for 2016. A similar fate might befall the Treasury in 2017 and beyond in view of these imprudent bailouts. Hence, in the final analysis, both these liabilities will fall on the Budget.

Fiscal reforms a must

Thus, it is necessary that the government sector should be reformed in order to facilitate it to allow the private sector to function as the engine of growth. An essential element in the reform of the government sector is the reform of the fiscal sector to enable the Government to allocate more resources for production rather than for consumption. In this case, a prudent use of scarce resources under the Government’s fiscal reforms is a must. (W.A. Wijewardena)

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