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Friday, 22 February 2019 00:00 - - {{hitsCtrl.values.hits}}
By Nisthar Cassim
Finance Minister Mangala Samaraweera yesterday said that the upcoming 2019 Budget, the first by the United National Front (UNF) Government following the breakaway of the coalition with SLFP, will be “important and interesting.”
Speaking at the American Chamber of Commerce Sri Lanka’s new monthly event “Breakfast Buzz”, Samaraweera didn’t give specifics, butquipped the 2019 Budget to be presented on 5 March will be “important and interesting.” He said that having stabilised the economy following the 52-day constitutional coup, the UNF Government’s twin programs, Gamperaliya and Enterprise Sri Lanka, will support economic growth and consumption. “This in turn drives consumption growth and helps all business activity as well,” said the Finance Minister, in what was his first talk at a business forum since the UNF Government was reinstated after the 26 October crisis.
In parallel, the Minister said the Government’s third priority is to continue reforms to enhance productivity and competitiveness.
He added that in the latter part of 2018, the country began to see results of recent efforts, as Sri Lanka moved up 11 places in the Doing Business index. “There is a lot more to be done, but it is clear that we are on the right path. We will continue to build competitiveness by liberalising the economy where we see excessive controls and costs. We are also investing heavily in training and skills development. We will work closely with the private sector in building the relevant skills. More on this will be revealed in the budget,” said Samaraweera.
On the eve of the Budget, the Finance Minister also used the AMCHAM Forum titled “ Changing the Paradigm: crafting and implementing evidence based policies” to update the private sector on the economic situation, and shared some thoughts on the Government’s broad plans and strategies.
He said that the Government will be implementing a rules-based economic framework that will create confidence in the sustainability of the policy outlook.
“The Inland Revenue Act for instance is an important piece of legislation that reduces individual discretion and builds in predictability. The same applies to a market-based fuel pricing mechanism. We will explore similar practices in other areas that help instil certainty and predictability,” the Finance Minister said.
“We will continue to consult with industry in policy implementation and provide the necessary time frames for industry to adjust to such measures,” he added.
Samaraweera also used the AMCHAM forum to explain the hard work put in to bring the country back to stability, after the cataclysmic disruptions to the economy during the 26 October political crisis.
He said in the lead up to 26 October, the Government had brought stability to an economy that had been adversely affected by successive years of drought, which debilitated rural incomes and hurt consumption across the economy. Global oil prices had doubled, and the US Federal reserve was ramping up interest rates, driving capital out of emerging/frontier markets.
However, from end October, global oil prices began to decline sharply, the Federal Reserve signalled an easing of their stance, and the consumption began to recover in the fourth quarter.
“Without any disruptions, Sri Lanka would have been able to enjoy a robust boost to the economy, and we would have seen a strong uplift in economic performance in 2019. Unfortunately, Sri Lanka was deprived of the opportunity to benefit from these emerging tailwinds, as we got engulfed in a political crisis,” the Finance Minister said.
The resulting loss in confidence triggered a surge in capital flight from debt and equity markets – bleeding over a billion dollars from hard earned foreign reserves and causing the currency to depreciate at a time when other emerging and frontier market currencies were recovering. Sri Lanka’s credit ratings were downgraded resulting in external borrowing cost surging into double digit levels just when the country had to re-finance US$ 5.9 dollars of external debt repayments in 2019. Tourist arrivals stalled soon after Sri Lanka was adjudged the best travel destination by Lonely Planet and a new campaign had just been launched.
Furthermore, Government cash flows were disrupted, as the plans to raise capital in the last quarter of 2018 could not materialise and without a Budget in November, spending plans were also disturbed. “As a result we are still behind target on cash disbursements, which would have typically been settled in January,” Finance Minister said.
It was in this context, he said, that the Government came back into power on 17 December.
“We have since repaired the damage to our external sector, and markets have regained confidence in the last 2 months. Today our external borrowing costs have declined by over 200 basis points – assuming $ 3 billion in fresh borrowings this year, which translates into a saving of over Rs. 10.8 billion. Foreign capital is now flowing back into the economy with Rs. 8 billion inflows into government securities since January – and the rupee has also appreciated 2.3% year to date,” Samaraweera disclosed.
Therefore, a lot of the damage from the coup has been addressed and the economy has again been stabilised. The Government is now looking forward and focusing on rebuilding and re-positioning after the disruptions, with three major economic policy priorities;
1) Ensuring continued access to global capital markets at an affordable rate to enable Sri Lanka to re-finance external debt this year
2) Uplifting economic growth through Enterprise Sri Lanka and Gamperaliya
3) Continuing its reform program to build competitiveness of the economy
A lot of work has been done to ensure the first priority. A key element of this would be the continuation of the IMF program, which will signal to markets the continued commitment to disciplined, rules based economic management. The IMF staff mission is in Colombo this week continuing negotiations with officials of the Treasury and Central Bank. The objective is to ensure responsible fiscal policies whilst enabling space to invest in targeted growth supportive measures.
By targeted growth supportive measures, the Minister referred primarily to Enterprise Sri Lanka and Gamperaliya. Enterprise Sri Lanka is a program to support private investment in small business, start-ups, and drive entrepreneurship. Sri Lanka has for too long relied on hand outs and artificial consumption booms to drive growth.
These are unsustainable measures that have repeatedly resulted in balance of payments crises. Enterprise Sri Lanka will drive growth through private investment and expand economic capacity for future growth. It has already seen over Rs. 70 billion in new credit disbursements going into SME exports, agriculture, and the service economy.
In parallel, Gamperaliya is a rapid rural infrastructure investment program. The need of this was highlighted due to the droughts that adversely affected cash flows into the rural economy. By October 2018 Gamperaliya was fast tracking investment into rural roads, small markets, and irrigation – and importantly putting cash back into the hands of the rural economy. This is no doubt one factor that supported the recovery of consumption in the fourth quarter of last year. In fact given the success of Gamperaliya, one of the first actions of the illegal coup government was to halt the Gamperaliya program by a cabinet decision. The Government has now resumed the program with renewed vigour.
Gamperaliya, for instance, includes investments in irrigation to improve climate resistance and reduce vulnerability of the rural economy. It includes investments in rural roads and markets to improve connectivity and integration into value chains that can uplift sustained income generation.
AMCHAM Sri Lanka President Michael Koest said: “Our goal for the Breakfast Buzz series is to create a platform where policymakers can partner with businesses and have open conversations to build sound and balanced policies. This kind of dialogue would make policy enforcement and compliance easier as policymakers can tap into industry expertise to aide in economic and national development.”
The forum included a panel discussion where leading economics and business experts deliberated on the key issues for the Sri Lankan economy. The panellists includedMano Tittawela (Senior Adviser, Ministry of Finance);Deshal de Mel (Economic Adviser, Ministry of Finance); Maninda Wickramasinghe (Country Head, Fitch Ratings Sri Lanka); andJeevan Gnanam (Chairman, SLASSCOM). It was moderated byArittha Wikramanayake, Precedent Partner, Nithya Partners.
Daily FT-Colombo Uni. MBAA post-Budget Forum on 6 March.
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