Emerging Sri Lanka and the role of the private sector

Chairman, distinguished members and friends, I would like to thank you for inviting me today to deliver the keynote address at the 172nd Annual General Meeting of the Ceylon Chamber of Commerce.

The private sector has been a longstanding partner of Sri Lanka’s development even through tough times and deserves a pat in the back for engaging with the Government from the colonial times, through independence, a three-decade long conflict, financial crisis and now in the process of moving into a Middle Income Country.

Reading the CCC’s latest annual report, I found the theme ‘Practical, Effective, Development’ very topical and timely for Sri Lanka in the current point of history.

 

Becoming an effective Middle Income Country

As we all know, to become an effective Middle Income Country Sri Lanka needs to focus on building strong institutions and a practical governance structure that benefits its entire people. This should certainly need to be coupled with increased investments in infrastructure and human capital.

This is a great time for private initiative to emerge and prosper. Many opportunities are there and are just waiting to be seized.

For that to happen, we need to all work together to move Sri Lanka out of poverty and project the image of the Sri Lanka we all love : a great place to visit, live, learn and most of all invest.

The chamber is in a good position to drive this engine of growth. You have done a good job over the years to pull together a good number of important private sector players and now it’s time you jump from good to great in positioning the private sector as a key partner in emerging Sri Lanka. I will be glad to further discuss how the bank can facilitate such a process through increased public and private dialogue.

The new Sri Lanka and opportunities

If you allow me, Mr. Chairman and dear guests, I would like to spend some time today on the new Sri Lanka and the opportunities that are created for the vibrant private entrepreneurs in this country. I would then like to move from that to talk a little about what other countries have done to mobilise private financing and boost their economy and finally suggest some areas where the World Bank could be of help in our dialogue with the Government and with you to support the objectives of the ‘Mahinda Chinthana’ of high growth and a decisive movement toward building a modern Middle Income Country.

Let me start with the post-conflict setting in Sri Lanka.

Post-conflict setting

The conflict as we all know, held back much of the country’s growth and development prospects following the liberalisation and opening up of the economy in late 1970’s.

The economy and the private sector responded very well to the end of the conflict:

• The Colombo bourse rose 6% on the day of the announcement and has been strongly upbeat since then.

• Tourism industry (one sector which was adversely impacted by the crisis) has begun to thrive. Tourist arrivals grew 46 per cent in 2010 and by a further 37 per cent during the first half of 2011.

• Considerable opportunities for the private sector from the hitherto untapped markets in the north and east opened up. Many businesses made good use of this. Just taking the example of private commercial banks – nearly 40 branches of private commercial banks opened up in the years 2009 and 2010 in the north and east. Among other things this bode well for the small and medium scale enterprises in these areas.

The macro front

On the macro front, there was a strong rebound in growth post-conflict from an average 4.7 per cent (1983-2009) to eight per cent in 2010 and likely even growth in 2011.

The country’s economic fundamentals have also improved considerably: (a) inflation and interest rates having come down to single digit levels (b) the rupee having stabilised and appreciating in recent times backed by strong BoP flows and strong external reserve position and (c) the fiscal deficit also narrowed considerably from nearly 10% in 2009 to around 7% in 2011.

The IMF programme the country entered to in July 2009 – a few months after the end of the conflict – has progressed well with the country marking the completion of the sixth review in April 2011 – the furthest it has progressed under any IMF programme in history!

Considerable challenges

But with all these feel good factors in the backdrop, considerable challenges remain for the country and indeed for the private sector moving forward:

First and foremost is the issue of lasting peace: Although the country has won the ‘war,’ its main challenge is to win the confidence of all communities alike. National reconciliation and nation building need to be a collective effort, one that the Government alone cannot achieve. Active support and partnership of the private sector, civil society and the international community is very much needed in the process – to ensure that the country sustains it’s hard won peace.

I have noted well the good work the chamber is doing in linking people from the north and east with people from the south. Business can facilitate the reconciliation process by connecting people to people and link them to prosperity.

Role of the private sector

It is important to remember that achieving 8-9% growth over the medium term as envisaged under the ‘Mahinda Chinthana’ needs to be primarily driven by the private sector.

To sustain these levels of growth the country needs to increase investments rates to around 35 per cent of GDP (from current 28%). The private contribution of this investment requirement should therefore need to rise to around 30 per cent of GDP from current 22%. This is a huge jump and it involves ramping up both the private domestic investment and Foreign Direct Investment (FDI).

Despite the fall in real interest rates and the gradual deepening of the capital markets – providing many avenues for businesses to tap capital (in forms of debt, equity, venture capital, etc.), the investment climate needs to be worked on further.

In Sri Lanka input costs are considerably high: the country pays one of the highest electricity tariffs in the world; labour costs are also rising with the gradual tightening of the labour markets. On top of this, the rigid labour laws in the country – makes the labour cost component– one of the most inflexible in the firm cost structure. All these are elements that any investor will look into when making an investment decision.

FDI

Clearly, the anticipated FDI flows following the end to the conflict has not materialised to a significant extent. The total FDI inflow recorded only US$ 435 m in 2010 – well below peak achieved in 2008 (US$ 690 m) and continues to remains low in relative terms (at <1 per cent of GDP). The factors outlined above together with others concerns as the general image still prevailing of country have certainly discouraged FDI.

This an area where Government and private sector need to engage in a frank dialogue on the issues that need to be addressed to ensure higher and more effective private sector contribution to the economy. The Government’s efforts towards improving the Doing Business indicators pose one such opportunity to engage in constructive dialogue.

Moving forward

With your permission Mr. Chairman, I would now like to turn the examples that could help our thinking moving forward.

Let me talk about Rwanda, a country, that a few years ago, was known only for the genocide and war that killed over one million lives. The economy contracted by 40% in 1994 at the time the conflict ended. A Government of National Unity Formed in 1995 and Paul Kagame was appointed President in March 2000.

Today, Rwanda is one of the fastest growing countries in Africa and has doubled FDI over the last three years. GDP growth averaged 6.5% since 2002 with inflation kept under 5%. The position in Doing Business moved from 143 in 2008 to 58 in 2010 and is still progressing. More importantly, the image in the world of this country has changed from dreadful genocide to unprecedented economic reforms.

Another example is Georgia, a country that emerged from the post-Soviet era as an independent nation in 1991. Turbulent times thereafter till around 2003 (Rose Revolution).Then widespread economic reforms including privatisations, public sector reforms coupled with concerted efforts to curb corruption. Actually, Georgia used its battle against corruption to promote its image internationally and attract FDIs. It moved from a rank of 112 in 2005 in the World Bank doing business to 12 in 2011 and made quite a stride in the Transparency International Corruption Perception Index.

One can always question the pertinence of such indexes, but they are available for all and often consulted by investors. Perception, image and information and communication are key factors that make this century what it is. Let us use them well to help disseminate the good news.

The successes in Rwanda and Georgia have largely been the result of an open dialogue between Government, private sector and other stakeholder where the difficult questions are openly debated.

Role of the WB

Let me finish my speech by saying a few words about what the WB can do to support the private sector to reap country’s emerging opportunities:

The bank is in a privileged place to be able to share knowledge, expertise and experience, connect people and institutions throughout the world.

In addition to our lending function to Government, that most of you are aware of, the Bank Group, through IFC, the private sector arm of the World Bank, has been directly engaging with the private sector of Sri Lanka and will certainly expand in the years to come.

We also facilitate south-south dialogue – this is an opportunity for both public and private sectors to share experiences with countries on specific issues.

Some projects, although Government funded such as the e-Lanka project and the recently launched Tourism and SME Development Facility project are opportunities for private sector engagement.

Next year with the Metro Colombo project, which aims to improve flood management and clean-up many of the main canals in Colombo, land will be made available for private sector investment to contribute to building the kind of city that is expected from a middle income country.

Just two days ago I spoke to an exclusive business community of Sri Lanka. There, I used a quote from a great man from the South Asian region – Mahatma Gandhi: “Be the change you want to see in the world.” Today, I like to leave with you an African proverb: “Peace is costly but it’s worth the expense.”

Let’s work together for a practical and effective, development for all of Sri Lanka.