Resilience and recovery in tandem needed to boost SL post-COVID-19

The Prime Minister’s Senior Advisor on Economic Affairs Ajith Nivard Cabraal and business leader Dhammika Perera share their insights on how the economy can recover from the COVID-19 outbreak, adapt faster, increase policy consistency through elections and utilise new instruments to return to growth

By Uditha Jayasinghe 

Sri Lanka’s prospects remain bright despite the COVID-19 impact, two top experts said yesterday, provided the country can put in place a strong recovery plan and be agile in taking advantage of new opportunities created by the global pandemic. 

The Prime Minister’s Senior Advisor on Economic Affairs Ajith Nivard Cabraal and business leader Dhammika Perera spoke of the impact of the COVID-19 outbreak on the economy yesterday in a webinar organised by SC Securities Ltd. and Daily FT. The webinar with record attendance was moderated by Daily FT Editor Nisthar Cassim.

During the extensive discussion, Cabraal, who is also a former Central Bank Governor, acknowledged that Sri Lanka’s economy has been hard-hit by the virus but was optimistic that as the country and the world at large increases its understanding of the virus and its impacts, they will also evolve ways to tackle it better, reduce into negative aspects and create new opportunities from the outcomes. However, he admitted that Sri Lanka’s economic prospects for 2020 were dim but insisted that if the crucial sectors are supported and not allowed to fall part, then prospects for next year will be better. 

Coping with shock 

“The way I look at it is, we need to understand how we can live with risks. Every day there are new risks, internal and external. Once you get shocked on the level of COVID-19, it is hard to be hopeful but the world will find ways to deal with the shock. 

“Even with the global financial crisis, initially there was shock but the world found ways to live with it. When you are hit by a bus, the shock is worst at the start but over a period of time, after evaluation, you find ways and means to deal with the patient. In the first quarter there was deep shock and everyone panicked but now we are coming to the beginning of the stage where people are finding how to deal with it. 

“The world will move to a new normal. That process has started, there may be some adjustments needed, and there will be tough calls, but in the next few weeks and months, the world will start coping with it,” he said.

Perera noted that he was not unduly perturbed by the virus as he had studied its evolution, starting from the first known case of infection from the coronavirus family in the 1960s, and was confident that the virus would run its course in about 10 months or so. Armed with this knowledge, he has worked to reduce business risks to zero, he told the hundreds of people who tuned into the webinar. 

However, he pointed out that fast-tracking growth in Sri Lanka’s economy in the short-term would be challenging as the majority of the country’s workforce have low skill levels and were more concentrated in the agriculture sector. 

Therefore, increasing the efficiency, productivity and competitiveness of the agriculture sector would be challenging as the Government would have to ramp up the skill levels of about 27% of the workforce engaged in agriculture.

“People think I am taking risks but in fact I’m not taking risks. About 62% of our population is unskilled, and this is where manufacturing can kick in, because to be in the services sector, you have to be skilled, but manufacturing is hard in Sri Lanka because our per capita income is high and salaries are high. But you have to give tax holidays and keep encouraging the private sector if they want to be part of sectors with unskilled labour, such as agriculture.”

“As a percentage of GDP, Sri Lanka’s corporate tax is the same as the US. Taxes need to be made more competitive. We need to create 62,000 new jobs every year, according to the World Bank, just to be at the same economic growth level. We need a separate package for agriculture because there is no other way to make them competitive. It is more sensible for the Government to focus on developing manufacturing and services sectors as they have the capacity to provide more growth in a shorter period of time.” 

Changing economic models 

Prime Ministerial advisor Cabraal, responding to a question on whether the Government would focus on a more inward economic policy, said it was possible that some aspects of the economy could change in response to challenges created by COVID-19. However, he acknowledged that export sectors would be supported by the Government and encouraged to expand when better times return. 

“We need to understand models will change in the context of all these challenges. Take agriculture. We were once comfortable with growing some types of food and importing others. That might not work now because some countries are cutting down on exports and keeping higher buffer stocks. Those countries are also changing policies in the interests of their communities. We should do the same.”

“Producing more gives us a new opportunity and new market. I think that is a very important step. We have a Rs. 53 trillion economy, but agriculture makes up a very small part of it and if we want to maintain growth, we will not be able to do that with agriculture alone. The issues in our manufacturing and services sectors need to be addressed with urgency. That is what will decide whether our economy will move forward or stagnate.” 

He agreed with Perera’s observation that services account for about 60% of Sri Lanka’s economy so the sector needs to be maintained or enhanced. Cabraal opined that while there will be changes in the services sector, it was essential for Sri Lanka to preserve it and take it forward. 

“Industries, such as apparel, are struggling but they need to be supported to move forward. Agriculture is the obvious one but other sectors are also important. IT services/exports need to be improved. Demand in the world will also change so we need to be agile and strike an important balance between protecting our companies but also evolving to take advantage of new opportunities. I don’t know if we have enough entrepreneurs willing to shift to these new opportunities. They need to change and stay relevant. Even garment manufacturers will have demand in the medium term but the need seems to be PPE and surgical masks, and if they can shift, they will find plenty of work. The new norm in the world is not how big you are but how fast you are. If we can get that right, we can get our act together quickly, and that it what needs to be done now.” 

Perera emphasised on the need to provide better training and skills development to younger people, and argued that for Sri Lanka to increase its per capita from the present $4,000 to $6,000, it will need to move away from conventional agriculture and subsistence-based farming. Perera also contended that even import substitution ventures, such as expanding Sri Lanka’s sugar industry, would be counterproductive as it would take about three to four years to set up a new sugar factory and it would eat up an extensive amount of land, water and other resources without really increasing the level of employment.

He went on to give examples from the dairy industry, which had been protected by the Government for decades but every effort to expand it, which included importing expensive dairy cows, ended in failure because Sri Lanka did not have the weather, the facilities or even the grass required for the cows. He argued that if the Government was set on agriculture, the only way the sector would be competitive is with massive subsidies as is given in other countries, including America.

Holding key sectors essential 

Cabraal, while conceding to some points made by Perera on agriculture, nonetheless focused on the need to provide Government support to some sectors, either in the form of the moratorium that has already been announced or the other policies.

“We have to hold the affected areas. If you damage them beyond a certain point, it is difficult for them to get back. This is why some sectors want some level of protection, and the Government will have to step in, find means and take it forward so that when the good times come, they are able to take advantage of them. The world will definitely change, so we will have to mirror that. 

“We will have to hold onto certain things but at the same time make use of the changes and reposition our businesses so we can make use of the new normal. Both of these things need to happen together. This year will be a very challenging year. Even a small growth would be a great thing but I think that will be very difficult. Having said that, I think if we can protect ourselves and keep ourselves in a position so we can take advantage of next year. Then I think we will do better.” 

Responding to a question on whether President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa as well as other policymakers were painting too glossy a picture for the masses, Perera stated it was important for the leaders of a country to look at the positive side. 

“We cannot always live on negativity. The President and the Prime Minister have to look at the positive side. There have been positives due to COVID-19. Education has been digitised as never before. Even old people are now doing online banking transactions. We need to focus on the positive things that happened during this time as well and make the best of them. 

“The Government has also lost a large amount of revenue during the curfew. They now have to pay public sector salaries and interest on debt. The Government is also in trouble. If we are hoping for money from the Government, we will be waiting for a long time. It is better for the private sector to rely on itself. My biggest concern is that if there is another COVID-19 spike and we have to close the districts, that it will be very problematic.” 

Cabraal also echoed Perera, insisting that Sri Lanka’s leaders have to stay positive to keep hope alive and encourage the private sector to keep reaching for solutions. 

“When you are the leader, you have to also fashion the future. If the leader says this year is bad, then nothing will happen. Firstly leaders have to articulate what future they want. If they say we will have negative growth, everyone will just get used to it. I think they are on the right track by pushing for growth and encouraging other stakeholders to join in.” 

Country stuck in ‘nonagathe’ 

However, Cabraal accepted that rolling out the moratorium for the private sector had not gone smoothly and lessons needed to be learnt from the implementation process. In addition he also claimed that the problematic implementation was due to the postponement of elections, which in his view should be held as soon as possible not just to give confidence to the public sector and policy direction to the private sector but also to attract global investors and engage with multilateral organisations for support, all of which would boost economic activity. 

“I’m also not happy with the moratorium. They took too long to get it off the ground. It was not clear enough, it did not get down to the banks and finance companies. So we have to learn those lessons and become better. We have to ensure the next stage is implemented fast, whether it is the moratorium or another directive. This is also why I think there should be a strong mandate. For the banks and others, the Government must have the capacity to give a strong edict. This is why I think we should have elections. We need a strong government to ensure that the public sector, businesses, investors and others can have conviction and confidence in Sri Lanka. We need a government – whatever that government is can be decided by the people.”

He likened Sri Lanka’s current situation to that of the inauspicious period during the Sinhala and Tamil New Year referred to as ‘nonagathe’, when the planets are transitioning and the old year has ended but the new one has not yet begun. 

“The ‘nonagathe’ is not a good time to do anything. There are certain periods of time when there is no clarity. We need clarity and certainty. Then the businesses are also clear on policies and there can be clear strategies given by the Government. If we can have this established as fast as possible, there will be responses as well. Other proposals, such as the COVID-19 equity fund, needs strong Government. Directives will not have the same impact when there is an interim Government. There is a huge necessity, and it will enable the Government and the country.” 

Perera argued that an “artificial fear” has been created in the minds of the people about holding Parliamentary Elections, and if people can go to work as well as attend to their other needs, there was no reason why people could not also go out to vote. 

“If we don’t hold elections, Sri Lanka will be like a company without a CEO. Voting is not forced. If some people don’t want to go out to vote, they don’t have to.” 

Option of using EPF to boost demand 

Highlighting that Central Bank data shows as much as 1.8 million credit card users have racked up Rs. 150 billion in outstanding debt on credit cards, Cabraal argued that it was clear people were cash strapped and in desperate need of liquidity. He suggested that some part of the Employees Provident Fund (EPF) be utilised to give people the choice of using part of their funds. 

“People are struggling to keep home fires burning. Some people will want to get some help with EPF. Funds can be used to settle their loans, or something else. The reality is the economy is not going to pick up unless demand is created. Whether it is a hotel or another business, people have to have cash to buy goods and services. This demand can be created if people have access to some EPF funds.”  Perera backed the idea and pointed out that the Rs. 250 billion the EPF earns each year as interest could be used for this purpose without touching the fund’s capital. 

“Finding the money is not difficult. The economy will find oil being put into the machine. Demand must be created, for hotels or businesses to start, someone must buy the product. Once contraction starts, it will continue, and turning it around will be harder. We have to see the merits and demerits of the idea. They need to look at it. We need out-of-the-box ideas. Otherwise if we stick to traditional measures, we will find it difficult to deal with this situation,” Cabraal added. 

Multilateral appeals and CSE reopening 

A multi-lateral appeal for debt support must come from a group of countries as this is a problem being faced by many countries, Cabraal noted. He argued that the developed countries need to understand that if developing countries struggle, it will have repercussions on developed countries as well. 

“The IMF, G7, and others need to understand this as the entire global financial system can be impacted. We also need to find a way for a debt write-off to be implemented. The IMF could call for a quick meeting for countries to make their representation and a position paper taken forward. If we don’t do this collectively, it will be problematic. If this goes forward, it will be the change that the world is looking for. I’m confident this will happen.” 

Cabraal noted Sri Lanka has sufficient reserves to pay the $1 billion bond in October. “The bigger challenge is the dearth in revenue. The Government needs rupees to purchase dollars and repay debt. If there is a stable Government, the investors will be reassured. We need the support of the investor community, we have to make sure our confidence levels are maintained, and so this bond has to be paid. Sri Lanka has never defaulted, and they will make sure payments are met at the right time.” 

Both Cabraal and Perera were positive that companies could not be burdened with taxes at this point and should ideally have more extensive support to recuperate from COVID-19 impact.  “We now need to stop burdening companies with more debt or taxes. They need to be supported by some kind of equity infusion; Rs. 200 billion new cash infusion is needed so new instruments are being considered. Many institutions in the world specialise in venture capital and equity investments, and I am confident if we do this right, we can attract them to Sri Lanka. This will also support banks and it will be beneficial to everyone.”

Cabraal also defended the large amounts of money being printed by the Government and said that the Central Bank and the Finance Ministry will have to work together to ensure there will be no spillover effects to the larger economy from the move. 

“Money printing is sometimes necessary in difficult situations. This is like an overdraft that individuals will ask from a bank to increase their liquidity in the short-term. Now it’s about Rs. 300 billion but this happened in late 2016 as well. I don’t think this is alarming. You need to have an idea of when this will be settled by the Government. When I was Central Bank Governor, we always received an assurance of when this would be settled, and they were settled on the date. It’s like a good bank management. Here the onus is on the Government to settle the amount, and I hope there is a good relationship between the Governor and the Treasury Secretary so the adverse impact will not spill over into the larger economy.” 

Both Cabraal and Perera were upbeat about the stock market returning to operations from today, though the latter said he has no plans to make any fresh acquisitions. However, in a typical tongue-in-cheek comment, Perera also said that if any of his managing directors wished to expand, then he could not disagree with that stance. Cabraal counselled investors to focus more on investment with a longer term outlook to make the most of the current uncertain environment. 

“I have always been an optimist about creating the future. If we think what our future is, we have a better chance of achieving it. We need to think where we want to go. We have had a low base in the last five years, and we need to find options that will take us forward quickly.  “We need to have a Government with authority to have clarity and clear policies to go forward. If we have that, then we have the ability to go to the world and state our policies and get partners to move forward. We need a revival and recovery plan to go together, and I think we have every reason to think we can move forward.”