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Wednesday, 6 August 2014 00:01 - - {{hitsCtrl.values.hits}}
The annual economic summit organised by the Ceylon Chamber of Commerce (CCC) under the title ‘Sri Lanka 2020: Towards Surpassing the $ 7,000 Per Capita’ kicked off with several important speeches delivered by Treasury Secretary Dr. P.B. Jayasundera and Central Bank Governor Ajith Nivard Cabraal.
However, the proceedings also included a repeat of President Mahinda Rajapaksa’s address delivered at the 175th anniversary celebrations of the Chamber. In it he retraced the remarkable journey experienced by Sri Lanka’s economy of the past few years and appreciated the enormous progress made after facing many challenges.
President’s address
Rajapaksa recalled the state of the economy before 2005, noting that high employment, poverty, debt levels, low infrastructure and low reserves posed huge problems terming the situation as “gloomy”. Referring to the delegations from the CCC that had talks with the government at that time he reminded that the most important request was the end of the war and extensive development of infrastructure.
“Despite 56 years of independence we were woefully behind. When my Government took over we had our work cut out to deliver those key fundamentals. Many people doubted us. Many said we would never end terrorism. Today many people are saying we will not achieve lasting peace but I’m here to say that we have already achieved this and will continue to assure it.
“We have achieved high growth in a world rocked with crisis. There were many that believed we would not have highways or roads linking the enter country in our lifetime. There were many that predicted the massive development we were carrying out we would provoke high inflation and a fiscal deficit beyond our control. But we have achieved significant development. As a result the CCC does not have to face these old problems,” he told the audience.
He noted that now the “mood” of the Chamber is to look to the future as it knows the per capita income will reach $ 4,000 in 2016 and therefore has the capacity to plan ahead for $ 7,000 per capita income by 2020. He then went on to share the ideology of the development carried out by the government insisting that when they were being built the focus was on the next 100 years. Attention is being paid to ensure sustainable development and provide sustenance to many generations ahead, he assured.
As a result of the extensive measures taken by the Government the country can now move towards a stronger middle income country. A lot of work still needs to be done, he emphasised, to ensure inclusive development, especially for the 6% of the population still in poverty so that they are not left behind. The infrastructure development needs to be utilised at a higher level so that investment can be attracted and funnelled into greater development.
“These achievements have been made by the Government and the private sector. When I say the private sector I mean from the top chairmen to the poor farmer and fishermen in the villages. All these people have to play a more enhanced role as we move forward,” he said.
He praised the private sector for guiding the destiny of the country and called for greater commitment to continue development. “May you all have greater wisdom and competence to guide your companies to deliver greater prosperity to everyone in our country.”
Economy and Government policies
Finance Ministry Secretary Dr. P.B. Jayasundera then provided an exhaustive analysis and recap of the economy and Government policies.
Moving beyond the $ 7,000 per capita income is a target Dr. Jayasundera is confident in achieving and noted exact numbers need not be bothered over. He praised the Central Bank for maintaining stability and assisting the Government in increasing investment, low fiscal deficit, infrastructure outlook, political stability and policy consistency since independence. This success story is often distorted and downplayed, he said insisting that politically-biased people need to see this progress for the greater good of the country.
“Sri Lanka has the chance to become an advanced country by 2035. When you see the slogans ‘sell Singapore buy Sri Lanka’ we have confidence our vision is gaining increasing attention around the world. Trade has grown nearly fourfold over the last few years and is breaking into new ground including IT, tourism and stronger financial sector.”
This year the growth target is 7.8% and the first six months have shown this target can be achieved, he added.
“All this is music to the years of macro-economists. There are those who attempt to label that these are IMF conditions but I invite them to read the ‘Mahinda Chinthana’ and the past Budgets to see the systematic policies of the Government.”
One idea now is brand building, especially for thrust industries. The connection between power and growth shows that marginal growth in energy results in significant growth of economy because of the technical advancements that use electricity in more competent ways. There is greater recognition for new instruments.
He noted the increased interest in the pawning market that has been estimated to be a whopping Rs. 500 billion, niche market for IT and in higher education where private universities have been welcomed, are some of the fresh areas in the Sri Lankan economy. These views generally reflect that the economy is in growth mode and everyone is looking for growth strategies. Growth must be demand driven and must take place in areas that allow social inclusion.
The 2020 tax reform policy
Moving on to taxes he insisted that new revenue areas need to be found in fresh areas of the economy. The 2020 tax reform policy is focused on larger base and low taxes that is promotional of growth. While allowing for a long-term base growth, reducing losses of State-Owned Enterprises, especially in Ceylon Electricity Board and Ceylon Petroleum Corporation, allows energy efficient industry and providing room for boosting economic actions.
“Our target is to make fiscal deficit in line with investment grade countries. Therefore companies need to use the business environment to their advantage rather than demanding tax holidays from the Government. Industry leaders need to acknowledge that providing skilled workers is not the responsibility of only the Government but also the private sector stakeholders. Budget assistance to skills development is being implemented.”
The private sector must also take care of its workforce by working with insurance and finance companies to ensure healthcare and retirement funds for its employees. Backyard economies and SMEs must also promoted and the way forward is for consultative engagement between established companies and others. Working out progressive labour policies is also important.
Infrastructure initiatives
He touched on the Government’s infrastructure initiatives had insisted that people who dismiss development are attempting to keep Sri Lanka regressive. He stressed that infrastructure is the best way to assure access to rural areas to integrate into the greater economy.
Climate related risks are also being addressed he assured, referring to drought engulfing the country currently. Urban development includes building apartments for underserved settlement and moving the defence headquarters so that prime land can be released for investment. Foreign Direct Investment (FDI) is being encouraged for urban development projects and local companies as well.
“It is time we all start to appreciate what our country has achieved since the end of the war and start feeling good about it. In my view the Government is progressing well on a sustainable corporate private sector, public, SME and combined sectors as the key pillars of the Government development drive. Research and development is one area where synergies can be promoted.”
The expropriation of bankrupt companies, clarifying land sale to foreigners, financial sector stability and reducing competition among SMEs are some of the key policies that the Government has focused on. However, other structural issues remain, he acknowledged.
Tea, apparel, IT and tourism
Tea is one example, which has been seeing increasing profits of late and is one of Sri Lanka’s success stories. Apparel is another where ethical practices have trumped the global market. The apparel industry has been tasked with putting Sri Lanka at the top 10 in the world and plays a pivotal role in the journey to achieve $ 7,000 per capita income.
IT alone is expected to employ 100,000 by 2015. Computer literacy is expanding to schools and work places with the industry expanding on skills development so modernisation in labour should push the industry to $ 5 billion by 2020.
“Tourism is a boom industry. It is expected to earn $ 5 billion by 2020. This will provide markets to home stay purveyors, beauty, handicrafts, eco-tourism, healthcare and these can provide new avenues of growth. Just as much as justice delayed is justice denied. A delayed decision is a lost opportunity.”
Concerted efforts are being made to reduce transaction costs and make doing business easier, particularly to SMEs. Centralised cargo facilities, reducing policy overlaps and increase in public investment has resulted in sustained growth. The aim is to raise private investment to 35% of GDP and lower public investment to 8% by 2020.
A strong economy needs a strong national Budget that will bring national pride. Budget must channel more investment to divert funds to human resource in excess of 6% of GDP, public spending on vulnerable groups need to be extended. Fiscal balance should reflect halving of fiscal deficit of the current 5% and higher revenue from growth expansion and plugging revenue leakages are all opportunities.
Surpassing $ 7,000 is not sufficient without reduction of poverty in parallel, he emphasised.
Sri Lanka 2020
Central Bank Governor Ajith Nivard Cabraal painted an attractive picture of the Sri Lanka that could be seen in 2020 if current plans are achieved but warned that there is a strong “to do” list for both the Government and private sector.
Sri Lanka in 2005 had an economy of $ 24 billion and at the end of this year could hit $ 74 billion, growing reserves and reducing deficit along with exchange rate stability has set Sri Lanka on a sound path. Times have changed completely but we will have to take time to understand it, he noted adding that Sri Lanka’s hunger has grown. Tourists are likely to touch on 1.6 million by end 2014.
“Every cent we do not get we have to borrow,” he said, following up on the Finance Secretary’s appeal for the private sector to pay taxes. Moving on to expectations of 2020, Cabraal noted that the best way to look at the future is to create the future, especially through creating a new financial structure for the country.
“We have new drivers in the country – new roads, new ports, new airports that have created a new future. In 2020 growth will be 8%, unemployment limited to standard levels, abject poverty eradicated, single digit inflation, current account surplus and a gently appreciating rupee. The Government also aims to be in the top 20 in Ease of Doing Business, equitable contribution by provinces to growth and high productivity levels.”
He also defended infrastructure development carried out by the Government insisting many of the projects, particularly roads if delayed would cost more and reduce economic growth. Financial sector turbulence needs to be put behind permanently, hence motivating the need for current consolidation measures. In 2020 agriculture will only account for $ 10 billion in the $ 150 billion while services will account for the bulk of revenue.
“No excuses” policy
The Central Bank report will also track new industries, probably from this year onwards, Cabraal noted in preparation to the 2020 destination. However, the Governor noted that the macro-fundamentals and trends need to be maintained with the assistance from the private sector. A “no excuses” policy like the delivery assured by President Rajapaksa needs to happen. Debt is expected to reduce to 50% with balance to payments up by $ 3 billion along with low inflation.
“Economic diversification needs to continue along the five hubs concept that provides opportunities for people to invest in. Before existing cash cows dry out Sri Lanka has been creating stars so they can be the cash cows for the future. New growth sectors would also need to revolve around these hubs.”
Many teams are also working on improving sovereign rating and he requested private sector help in this. As a result of the financial consolidation to have three banks above Rs. 2 trillion level and State banks to have regional presence along with offshore banking facilities. Overcoming old age is another challenge, Cabraal pointed out, suggesting extended retirement periods and adjustments to labour workers. Female workforce also needs to be more integrated.
Investment channels also need to be made smooth with legal risks and policies being ironed out. The aim is to make Sri Lanka project a new image, even encouraging Sri Lankans to invest outside the country. The five hub strategy would also ensure inclusive development, less wage pressure, higher employment productivity and sustainable development.
“This to do list is formidable but it is possible to achieve. It is practical and many of the elements are already in play. This is the advantage everyone has within their reach.”
It is also imperative to move beyond 2020 and consider the situation in 2040 when Sri Lanka has the potential to achieve the lower part of the high income category where per capital income has moved to about $ 20,000 that is where South Korea is about at present, he added.
– Pix by Lasantha Kumara and
Shehan Gunasekara
Talking tough
Following the speeches, Treasury Secretary Dr. P.B. Jayasundera and Central Bank Governor Ajith Nivard Cabraal participated in a short discussion where they answered several questions from the audience.
The first question centred on how Sri Lanka’s high growth can be sustained without an increase in inflation. Dr. Jayasundera responded by noting productivity must increase to sustain high growth without price pressure pushing up inflation.
“People need to start thinking about what a middle income country produces so my belief is that we need to bring more tourism-led, export-led production. We need to supply infrastructure, food security, storage capacity, energy security and backward linkages so supply side is taken care of and inflation remains low.”
The next question was on relatively low credit growth and was taken by Governor Cabraal.
“There is a feeling that credit growth has not taken off but if you drill down one of the reasons is because the pawning advances have come down drastically from about Rs. 600 million to Rs. 400 million, which is why we have provided a guarantee. In addition borrowings from the State owned enterprises have reduced. In fact they have become net re-payers. The good news is that it has not affected our overall numbers and money supply has not gone up because of lower inflation. Still be able to deliver the same growth numbers that we are targeting.”
Responding to a question on low numbers of domestic consumption Dr. Jayasundera went onto say commodities need to be defined pointing out that when it comes to items such as vehicles there has been growth. Consumer expenditure surveys show marked shift from food to services and other goods underlying a structural shift. “People should not under-estimate the pawning market, this market has compressed and drought could be affecting consumption. But by and large exports, tourism, trade, IT and supply of consumer durables are growing at a high rate.”
Could financial sector consolidation result in lower competition, questioned another with Cabraal insisting stability was the key concern of policy makers.
“Economy is all about choice. Do you want to have a smaller number with stability or a larger number with instability? Also we are not looking at a very small number of banks. The finance companies will only be reduced to 20, which is a good number for a country of our size. Within this structure they can have even more consolidation and in time I think people will realise the importance of stability. Need capital and wealth and capital formation for the growth the Government is targeting.”
When questioned if the Government was thinking of rolling back its tax holiday for IT companies, Dr. Jayasundera quipped: “We have had enough holidays.” But became more serious as he explored the economic challenges created by tax holidays since independence.
“The question is when we are going to start building ourselves? If we start for one sector then we have to consider other sectors as well. The peace, infrastructure development and political stability will offset need for holidays. What we have now is a luxury, earlier the longest we plan for is the next year Budget. Growth will happen when pain is there.”
Elaborating on the Sri Lanka-China Free Trade Agreement (FTA) Dr. Jayasundera called on the private sector to “get ready” to do business with the world’s fastest growing economy.
“My advice is we have done the basic work, here we are quite optimistic based on our experience with other countries. When Sri Lanka did its FTA with India Sri Lanka was at a much weaker point. Now I’m confident we can reach the milestone. My advice is to please get ready. You have to act and your acting depends on understanding china. Look at the tourism, just this year there will be 100,000 tourists and it could grow to 500,000. Similarly when FTA happens you have to understand everything Chinese or we will not get much in return. Business community must get ready to go to China for larger markets.”
