CB Governor outlines how to go beyond 2016

By David Ebert

With the recent unveiling of the Central Bank of Sri Lanka’s ‘Road Map for 2013’ targeting a growth plan that aims to achieve a US$ 4,000 per capita income by 2016, The Finance Houses Association of Sri Lanka held its 54th National Conference yesterday at the Galadari Hotel under the theme ‘Moving Towards the 4K Era and Beyond’.

This year’s convention, focused on the growth momentum required in order to propel Sri Lanka to an upper middle income country category and the significance of the opportunities and challenges that await the non-bank finance industry in its role towards realising this objective.

The Chief Guest at the conference Central Bank Governor Ajith Nivard Cabraal delivered the key note address that focused on the steps needed to be taken by NBFIs in order to be prepared to better exploit the opportunities that arise in a time of transformational change and the important role that the industry plays within the broader economic system.

The Governor waxed eloquent on the confidence of the Government in achieving the expected growth targets in the midst of initial scepticism and commended the association for recognising the greater importance of the government’s economic targets and for using the conference as a forum for the discussion of how to achieve and go beyond the 2016 scenario.

“First of all I would like to congratulate the FHASL for selecting the theme ‘Moving Towards the 4K Era and Beyond’ and also for putting together this conference where all of you will deliberate on the challenges and opportunities in going forward towards that very laudable target that we have set for ourselves.”

“I remember in 2004 when our per capita income had just reached US$ 1,000, we were talking about moving to the next era and at that time there were views expressed that we should move to a US$ 4,000 per capita income but there were also many sceptics.”

The Governor also blamed the decades-long conflict, the difficulty in establishing law and order and the resulting cracks in the country’s financial system for the pessimistic outlook among experts who voiced objections about the Government’s ambitious growth plans.

“However, we took up the challenge and we believed that we should be able to transform the country to a level where we can talk about a US$ 4,000 per capita income in one sense and we could aim for an economy that is valued in GDP terms of about US$ 100 billion. This was an enormous step forward and I remember once again in 2008 when the President took up this point in his ‘Mahinda Chinthana’ vision for the future and articulated very specifically that Sri Lanka would move to a US$ 4,000 per capita income, even at that stage there were people who believed that it was once again only a dream.

 “Today we have much confidence and are within striking distance of our target and it’s now fairly clear that we would reach that figure by 2015 and move beyond that in the next few years quite comfortably.”

He also advised the industry to avoid complacency at all costs by thinking beyond the 2016 target and plan for the next stage of development or face the fate of many other countries that reached the US$ 4,000 per capita income target and failed to keep the momentum going, resulting in a ballooning middle income trap.

“So what happens when we move to an economy of a US$ 100 billion, will it just be business as usual where we would continue as we are or does a paradigm shift take place in a country which is moving to that level. The Central Bank did many studies into this matter and we found that there was evidence to show that many countries when they reached  the US$ 4,000 per capita income level they have the opportunity to of progressing much faster and so far there are 106 countries that have moved beyond that income range and we tracked their progress before and after the change and found that the growth of a country which is reasonably slow up to the point of US$ 2,000 income takes off at the much faster pace after the US$ 4,000 mark has been reached.

“So that is the reason why the US$ 4,000 per capita income was selected as the paradigm shift point as far as our country is concerned. So now we have to find out what would happen beyond that and if we are geared to meet the challenge of the US$ 4,000 per capita income era and beyond which is a very critical factor in this whole exercise.  Do we go there and stop or do we move with greater confidence as we go on?

“However there were many countries that stagnated after reaching that target and economists find new terms for these concepts such as the subprime crisis, the fiscal cliff and now they have also spoken of the middle income trap. So when the country is moving into the next stage, naturally we have to see if we are geared sufficiently to avoid falling into this middle income trap. I have seen many people writing about it and it is useful for us to have this discussion because then we move and we can have the confidence that we are taking the necessary steps to go beyond that trap safely. “

Governor Cabraal also stated that the Central Bank Road Map for 2013 unveiled early on in January this year clearly articulated the steps needed to go beyond the expected income target and avoid the middle income trap as well while attributing the origin of the strategy to the ‘Mahinda Chinthana’ vision of diversifying the economy.

“When you heard of the five hub concept mentioned in the ‘Mahinda Chinthana,’ you may have wondered why it is necessary for the country to now have new hubs identified? The reason is that we needed some focus for the expansion of the economy and that is why new fields were added into the economy such as the naval, banking, aviation, commercial and knowledge hubs all which will provide a nucleus for the next wave of development that will take place in our country.

“We have had tourism coming in as bonus so now we speak of five plus one which gives us a new canvas on which to draw on and one of the key reasons as to why these countries fell into this middle income trap was that they did not have new strategies to expand the economy after reaching the US$ 4,000 per capita income target.”

“So that gap was being addressed by the Government in illustrating the post US$ 4,000 per capita income strategy and that falls somewhere within the range that we need to now look after in order to expand the economy with confidence and greater ability.” The Governor also listed other areas that he felt the industry needs to focus on such as the savings and investment gap that exists stating that while there were many who projected this problem at the outset and articulated various theories about, there were few solutions being offered.

“We need to have some strategy which will fill that savings gap if we are to go forward. We all know that this gap exists and many developing countries go through that situation, so we have identified very clearly and that there will be a need to remit foreign capital from outside in a certain period of time in order to make sure that the savings that we require, if it is not generated locally it can be remitted from outside so we can bridge that gap. That is why we brought in certain relaxations in the exchange control regime in order to make it easier for people to gain equity as well as borrowings in order to ensure that their capital base is expanded. Then at the same time we have to make sure that the doing business indicators are also enhanced because with people coming here to do business, the first thing they look for is a good platform to do business. The international norm is the doing business index that is enunciated by the World Bank and the steps that we have taken.” The event, attended by over 300 guests, Chairmen, Directors and CEOs of financial institutions in the country was heralded with goodwill messages from President Mahinda Rajapaksa and Deputy Minister of Finance and International Monetary Cooperation Dr. Sarath Amunugama.