Departing CB Chief says economy not in dire straits

By Charumini de Silva

Departing Central Bank Governor Arjuna Mahendran on Wednesday played-down global volatility, asserting that Sri Lanka still had a few silver linings and called for greater private sector role in financing infrastructure development.

Assuring that the economy was not in a ‘dire’ situation, he emphasised that the country needed to think afresh on how to generate revenue and resources to pay off the existing huge debt burden and then contract new funds to help the economy grow further. He highlighted tourism, ICT and rebound in Foreign Direct Investment (FDI) as possible springboards for the economy. 

“The Government essentially has to take a backseat now, regrettably raise some taxes and fund the future growth of the economy,” Mahendran said at the 19th Annual General Meeting of University of Colombo MBA Alumni Association held on Wednesday in Colombo.

Although Brexit will have consequences for Sri Lanka and was a totally unanticipated once-in-a-lifetime event, he outlined the opportunities the economy could bank on to attract Chinese investment such as equity swaps, revamping of public sector and unlocking energies that had been trapped in this huge bureaucracy. “We have to mobilise the private sector to offset the existing debt burden,” he added.

“Right now about 94% of every rupee of Government revenue is being used to service past debts, leaving only six cents for the Government to spend on salaries and infrastructure building for the future. 

We have 1.4 million people working in the public sector and with their dependents, it is almost five million. Out of the total population of 21 million, a quarter of it depends on the Government — this is unsustainable. This is one big problem we need to fix,” he stressed.

In terms of revamping the National Carrier, SriLankan Airlines, Mahendran said that the firm would focus on short-haul operations in the region, asserting that it would gradually move on to long-haul operations by tying up with a bigger operator in the immediate future.

He pointed out that during the period of 2009 to 2014, the country had been borrowing foreign money heavily to keep the rupee pegged and was invested in unproductive projects such as the Mattala Airport, Hambantota Port and some highway projects, resulting in not generating expected returns. Hence, servicing those debts in rupee terms was more expensive.

“Sri Lanka has a natural break to our ability to grow fast. Our sustainable rate of growth is being hamstrung by the fact that we have a build-up of debt behind us which needs to be serviced and it has not been invested into terribly productive investments to generate those debt service flows. Thereby it creates a bit of a wobble in the balance of payments for us to keep financing those debts,” he explained.

The Governor noted that despite the high interest rates, bank lending to the private sector was growing at 27%, which was an encouraging factor to showcase confidence in the economy.

However, he said considering the current status of the economy, bank lending to the private sector was far too high and therefore the Central Bank would raise interest rates further to try and dampen unwanted enthusiasm which could lead to high inflation.

Noting he was no stranger for controversy, Mahendran also said: “It’s been a very interesting year-and-a-half. I returned last year after 12 years on the invitation of the Government of Sri Lanka to helm the Central Bank.”