“There is no economic crisis”: Cabraal

Q:  Do you believe the country is heading towards an economic struggle? 

A: The whole world has to face serious economic challenges. Sri Lanka is no exception. But, even with such challenges, we are on a planned path to reach a per capita income of over US$ 4,000 and a GDP of US$ 100 billion by 2016. These are ambitious economic goals and we need to work hard towards those goals. So far, we are on track and I believe we would be able to deliver on those targets.

Q:  Do you agree that as the Governor of Central Bank you are partly responsible for the dire economic situation in the country? 

A: Over the last three years, Sri Lanka has enjoyed a growth of 8%, 8.3% and 6.4%, the highest-ever in our history. Our reserves have been comfortably above US$ 6 billion in the past three years and are now close to their highest-ever levels. Our unemployment is less than 4%, the lowest ever. Our inflation has been in single digits for the past 50 months, the longest-ever period of single digit inflation. Our Doing Business ranking has improved to about the 80th level, the best ever ranking that Sri Lanka has enjoyed in the global index. FDI in the last two years has been above US$ 1 billion, the highest-ever in our history. Our debt to GDP levels have decreased to around 80%, the lowest in 30 years.

This month, we opened a new international airport. In the last two years, we started a 300 megawatt coal power plant, a 110 megawatt hydro-power plant and commissioned the first-ever highway in the country. This year, we will add another 300 megawatts of coal power to the National Grid. The Colombo/Katunayake Expressway will be completed and the Southern Expressway will be extended up to Matara very soon. During the past few years, almost all trunk roads have been completely overhauled and thousands of kilometres of rural roads have been concreted. More than 100 private sector hotel properties are coming up. Not a single one of our banks collapsed during a period where hundreds of banks in the world collapsed. The list of achievements goes on and on.

If the above indicators are indicators of a dire economic situation in the country, then I will take great pride in being partly responsible for such situation.

Q:  Economists say bad economic policies are the main reason behind the economic crisis. Do you agree? 

A: There is no economic crisis, as I already told you. However, these make-believe crises have been conjured up by various economic hitmen over the last six years. Those economic hitmen even went to the extent of saying that Sri Lanka will default on its debt and that our inflation will be like in Zimbabwe! Every three months, they invent some new theme. If you go through the past editions of your newspaper, you will see how many times they have shouted “Doom! Doom!” but had to eat their words after some time. Then they put that story aside and start on a new one. We are now used to this false propaganda, and I believe that people too have begun to see that these are mere political slogans and the cries of desperate politicians.

Q:  UNP MP Harsha de Silva has openly said that it is you who signed an agreement with the IMF to devalue the rupee. Is it true? 

A: IMF agreements are signed by both the Minister of Finance and Governor on behalf of the country. This Government and the Central Bank under my watch have disclosed all these agreements the moment those were signed, unlike in the past. If Harsha de Silva has seen any clause in any Letter of Intent between the Sri Lanka authorities and the IMF during the period 2009 to 2012 where Sri Lanka has agreed to devalue the rupee, then let him show it. But, as is usual, he has got mixed up, because everyone knows that it was the Government of Silva’s party that devalued the rupee by over 90% in a single day!

Q:   Why is he making such accusations?

A: In recent times, Harsha de Silva seems to be in the bad books of his own Party Leader for being highly ineffective and for losing focus. Silva is also being openly criticised by his Colombo District Leader, who is also in the running to be the economic spokesman for his party. So Harsha de Silva is probably becoming isolated and desperate, since his ability to convince his own party people is now eroding. In that situation, it seems he is venting frustration on the person who he thinks is regularly making his prophesies come to zero.

Needless to say, other than one or two pro-Opposition groups, the people of this country have already understood that de Silva’s criticism has no substance, and that he blindly takes a contrary view to the Government and the Central Bank. When the Government says it will consider a loan from the IMF, he says not to take it. When the Government says it will not seek assistance from the IMF, Silva says to take it! Knowledgeable people have got tired of these types of comments, because they see the shallowness of his arguments. Hopefully in time to come, Harsha de Silva, the economist turned politician, will slowly learn that he needs to talk about issues dispassionately, and not resort to personal, venomous and angry attacks against those who have different views.

Q:     Harsha de Silva has continuously attacked your exchange rate policy, claiming it has ended up as a balance of payment crisis. Your comments?

A: Let me categorically state that we have never had a balance of payment crisis, in the last few years other than a BoP crisis perhaps in the mind of Harsha de Silva and a few of his friends. This accusation of a so-called BoP crisis has been levelled by those vested interests to serve their own political ends. The facts indicate a different story.

During my watch as the Central Bank Governor, over the past six years or so, our reserves have increased by nearly three-and-a-half times, from just about US$ 2 billion in 2006 to nearly US$ 7 billion by 2012. The country has been able to import all types of commodities and intermediate goods that it had required without any interruption, while also paying an oil bill of over US$ 5 billion in 2012. All types of businesses – imports, exports, services or construction – have been supported to deliver a high growth level. With all that, we have been able to grow our reserves and that is continuously taking place. So, it is obvious that our exchange rate policy has been working effectively in a balanced manner.

It must be understood that the exchange rate policy can vary from time to time, depending on external factors and internal requirements and goals. Within such a policy framework, we have been able to provide a stable financial environment in the economy to ensure balanced development. Over the past few years, the leading global currencies have shown intense volatility. However, even in such an environment, many exporters, importers and other stakeholders have commented that Sri Lanka had been able to adjust to the times and had been successful in providing a stable external platform. Notwithstanding Silva’s comments, we are confident that we would be able to continue with providing such a stable environment in time to come as well.

  Q:   What happened to your promise of 9% growth for 2012?

A: In 2011, we forecast a growth of 8% for 2012. However, during 2012, the economy suffered from many shocks. Firstly, a drought and then floods. In addition, the world did not experience the envisaged turnaround of the European economies in 2012 as predicted by global analysts. Notwithstanding these serious setbacks, Sri Lanka was able to realise a growth of 6.4%, which was much better than what many countries were able to achieve.

Let me also remind you that the IMF downgraded its own forecasts of worldwide growth four times during 2012. Such revisions are not uncommon and are understood by those who know elementary economics. They don’t get excited like some vociferous politicians, when growth forecasts are revised. For the record, let me also say that Sri Lanka’s ability to manage a difficult year with a growth rate of 6.4% while positioning itself on a sound platform to increase growth in 2013 is viewed by unbiased analysts as an outstanding achievement.

  Q:   Minister Wimal Weerawansa attacks the Treasury Secretary and calls him an economic hit-man. According to Weerawansa, it is the Treasury Secretary who is messing with the country’s economy. Your comments?

A: In the recent past, the term ‘economic hit-man’ has been used in an appropriate manner by some analysts to describe an Opposition politician who has been leading the misinformation campaign against the country. At one time, he and his people surrounded HSBC and asked the bank not to arrange loans for Sri Lanka. At another time, he tried to frighten people by claiming that Sri Lanka would default on its debts. Yet again, he tried to destabilise the economy by saying that Sri Lanka’s inflation would go above that of Zimbabwe. In another instance, he shouted that the banking sector would collapse. This same person also called the world’s No. 2 economy, China, an economic hit-man. Those are the words and actions that are consistent with that of an ‘economic hit-man’.

On the other hand, Treasury Secretary Dr. P.B. Jayasundera has been playing a vital leadership role to guide the economy to the current remarkable levels and the exemplary economic outcomes that we have achieved. In this background, it is easy for people to realise who the actual economic hit-man is.  

Q:   The Opposition claims it is you and MP Namal Rajapaksa who are behind Weerawansa. Is it true?

A: That is an absolutely false claim. But, in fairness to the Opposition, I must say that I have not heard a single Opposition MP say that. But these types of anonymous, mischievous comments and scurrilous web stories are an integral part of the current misinformation campaign that is churned out by some destructive elements. The Treasury Secretary and I have an excellent relationship and I think we have worked well together over the past six to seven years. We meet at least twice monthly at the Monetary Board, and we speak to each other very often in order to keep each other updated on economic progress. I know some members of the Opposition would have preferred if we were at logger-heads with each other, but I am sorry we have to disappoint them on that score.  

Q:   Why did you request an IMF loan knowing that they will not accept budgetary support?

A: It is a well known fact that if the Government could have obtained funds from the IMF through the Central Bank, such funds would have been substantially cheaper than from any other source. Therefore, we naturally explored that possibility to obtain funds for the Government from the IMF, which we believed would have given us a definite advantage. There is nothing wrong with that. If we did not do so, you would have probably asked us why we did not consider the IMF funding option seriously.

  It is only after we had exhausted the IMF option that we decided to move towards other options, since such options are a little more expensive. The pursuit of IMF funds was done in good faith, and rather than finding fault with the Sri Lankan authorities for doing so, people should be commending the authorities for pursuing every option which could have brought some savings to the country.

Q:   Inflation is on the rise despite your attempts to contain it. a) How would you describe this situation? b) What are your predictions? c) How can you keep a tab on inflation?

A:   As we had forecast last year, inflation will begin to moderate from this month onwards. Thereafter, it should remain in single digits for the rest of the year and edge towards the mid-single digits by the end of the year, unless some major unforeseen conditions occur in the world. As I have already told you, we have been successful in maintaining price stability by ushering in the longest-ever period of low inflation in our post-liberalisation history. Some so-called politicians under the guise of economic experts are very unhappy about this development and are therefore beginning to cloud this achievement by concocting some random calculations and thereafter claiming some bogus inflation numbers. However, I know people will not be misled by these silly attempts and would see through the motives behind these political adventures.

Q:   Despite your assurance that interest rates will come down, the Treasury bill rates started going up. Why?

A:   The Central Bank’s policy rates were lowered by 25 basis points in December 2012. Further, during the last six months, interest rates have come down by more than 2%. The current inflation numbers do not warrant an increase in policy rates. However, as everyone knows, Treasury bill rates may fluctuate within a limited range due to various market conditions. This is understood by all economic stakeholders, and I do not think that anyone expects interest rates to stay static forever, or come down all the time.

Q:   Do you see a policy rate increase in near future?

A: As we have mentioned in our recent monetary policy statements, we do not see the policy rate being under pressure for an increase in the near future, since inflation is behaving as predicted. It is also our view that the demand side pressures are under control, because the growth in credit as well as growth in monetary aggregates are modest and within the expected ranges. Such conditions do not warrant a further increase in policy rates. In fact, under those circumstances, the tendency would be to relax monetary policy in time to come, and not to tighten. In any case, the Monetary Board would be watching the global and local developments closely at its fortnightly meetings, and would act in an appropriate manner in keeping with the evolving circumstances.  

Q:   Do you agree that our returns on investment have come down? We are not getting what we expected from the Hambantota Port, Norochcholai plant and other mega projects. a) what are your plans for debt recovery? b) What measures will you be taking to tackle the issue?

A: All major projects are carried out with a long-term time horizon. The Victoria Dam was not built to last five years and to provide a short-term return. In the same way, when we now build ports, airports and new roads, the return expected is not within a short-term. Further, a substantial part of the return from a particular project may arise from the indirect impact of the project as well. For example, a new highway cannot be assessed from the toll revenue generated from the highway only, because, as we all know, through the construction of a new highway, new lands will be opened out for industries, and new services too will be generated, and such new activities will contribute to the economy’s expansion. Therefore, the economic benefits of the mega projects must be assessed from an indirect perspective as well.

Let us also remember that new ports, airports, roads, and power plants are built to last many decades, if not centuries, and the enduring benefits will be available for many generations to come. For a long time, one of the main problems in our country was that the economic planners did translate foresight and vision into reality in order to position the country for a bright future. Fortunately, President Rajapaksa is now practically implementing his vision with a deep sense of dedication and commitment, and we, as an integral part of the economic framework of the country, are fashioning the objective to position the country for that desired outcome. Of course, that bright future is now gradually unfolding before us, and although it is unpalatable for some persons, the majority of the people of this country are beginning to appreciate the benefits.

  Even more importantly, while these mega plans are being implemented, we have ensured that economic and price stability is maintained. That includes our consistent and continued ability to be able to repay our debts in a viable manner. Based on the globally-accepted UN-ESCAP indicators, Sri Lanka has improved its debt payment capabilities over the past six years. At the same time, the loans that we have taken have been for national projects that are expected to provide substantial direct and indirect benefits to our nation in the future. We have not taken loans to eat bread, as was done some time ago! By implementing our current prudent policies, we have also improved our debt payment capabilities, at a time when many countries in the world have been moving in the opposite direction.

Q:   Are we heading for another rupee depreciation in near future?

A:   Over the past six months, the Sri Lankan rupee has appreciated by more than 5½ per cent. The current trend also seems to be that inflows into the external account are more than the outflows. In fact, as a result, the Central Bank had to intervene on many days, absorbing nearly US$ 500 million in order to ensure that the Sri Lankan Rupee does not appreciate more than what it already has. In these circumstances, I am at a loss to understand as to who could have even suggested that we are heading towards a depreciation of the rupee.

Q:   IMF and Moody’s warned of a debt trap. Although we have always maintained an 80% debt to GDP ratio, it has now exceeded that figure. What are your plans to overcome this situation?

A: It is absolutely incorrect to say that we have always maintained an 80% debt to GDP ratio! Our debt to GDP ratio reached that level only in 2011, after 30 years, as a result of our recent prudent measures. However, I would agree with the IMF and Moody’s when they state that there is room for improvement in our debt to GDP levels. In fact, we too have articulated the same position, and have been moving in that direction in the past seven years. In fact, it is due to our concerted efforts that we have been able to tighten our debt to GDP ratio to reach the level of around 80% last year from a high of around 105% in 2002. That is a remarkable achievement, particularly at a time when a substantial public investment program which has put the country on a very ambitious growth path is underway. At the same time, we would also acknowledge that we have to consolidate this situation further through prudent debt management, while the Government too has to continue reducing the fiscal deficit. Over the past four years, the fiscal deficit has been brought down from a high of 9.9% of GDP in 2009 to 6.3% of GDP last year. That is a movement in the right direction and we believe that if we sustain these efforts of fiscal consolidation, we would be able to achieve a debt to GDP level of around 65% by 2016.

                  

                         

Q: Vijitha Herath has said the entire Cabinet is responsible for the economic mess. As the Chief of the Central Bank, what is your response?

A: Those are hollow words uttered by politicians who no longer have a popular base. Such persons have to make outlandish comments in order to be in the public limelight and we must be able to understand that. If the people believed them, the people would have supported them to come into office. The political popularity of these politicians is an indicator of how much the people believe their comments.

Q: Was it the vehicle tax reduction which led to a BOP that forced Sri Lanka to go for an IMF loan?

A: The vehicle tax reduction took place after the IMF loan was taken, and therefore it is clear that there was no connection between those two situations. Let us also remember that for a long period of over 25 years, the economic activities in our country were stifled as a result of terrorism. After its end, the reduction of the duty on the import of vehicles was designed to give an opportunity for more people to purchase vehicles at a reasonable price and to support the growth momentum. Economic policies have to be viewed in the context of the longer term outcomes in the macro fundamentals, and must not be looked at only on an individual policy basis. We have always taken a macro view of the entire economy when we take decisions, and that is why we have been able to deliver long-term growth and stability. For the record, let me once again reiterate that our external account has been managed in the most appropriate manner in order to deliver the sound macro fundamentals that we enjoy today.

Q: Although you and the Government say the economy is booming and the country is developing, Cabinet Ministers such as Wimal Weerawansa say the country’s economy is in a critical situation. Your comments?

A: Different people may view the economy from different angles at different times. Every day, we hear the Opposition MPs including Harsha de Silva screaming that the economy is in a major crisis. But that does not mean that the economy is in a crisis or in a critical situation. Everyone knows that. We must also appreciate that there may be a few instances of certain Ministers not being fully satisfied with every aspect of the economic management of the country. Such Ministers are entitled to have such views in any democratic country. Managing the economy is a challenging task and there are bound to be occasions when some persons may not be satisfied with the progress, or have different views as to how certain aspects of the economy must be managed. That too has to be understood. However, the present economic outcomes indicate a viable and favourable situation and we are on track to reach an over US$ 4,000 per capita income, and US$ 100 billion economy by 2016. In that journey, we will have our share of challenges, but we are confident that we will be able to deliver on the vision that has been articulated for our country in the ‘Mahinda Chinthana’.