By Charumini de Silva 

The Chartered Institute of Marketing (CIM) Sri Lanka concluded its third CEO’s Breakfast Forum for 2016 at the Ramada in Colombo recently. 

The event brought together nearly 100 top CEOs, marketers, business leaders, CIM fellow members and senior corporate executives. This was also the first time Central Bank Governor Dr. Indrajit Coomaraswamy was speaking to the corporate sector since the 2017 Budget Speech.

CIM Sri Lanka organises many versatile events like the CEO Breakfast Forum to cater to the key needs of its senior members and add value to CEOs and its membership. As a professional institute, CIM places great emphasis in bringing together programs that are topical and relevant, targeting the members and business community. The objective of this forum is to create a platform for participants to share and exchange key insights which will provide support in making strategic corporate decisions for the future. 

Best chance in 50 years

Dr. Coomaraswamy delivered his remarks from a macroeconomic perspective, outlining the challenges and opportunities Sri Lanka faces while also emphasising that it presently had one of its best shots in 50 years. 

He emphasised that sustained growth included strengthening macroeconomic fundamentals, enacting structural reforms that improve the competitiveness of the economy and improving the business environment. 

Noting that it could not be business as usual, Dr. Coomaraswamy emphasised the importance of monitoring the arising opportunities that could be gained by marketers by understanding people, trends and likely changes in a world which was developing at a rapid pace. 

Fiscal challenge

According to the Governor, structural problems that were amplified by the wrong set of policies had caused large fiscal and trade deficits, the core weakness of the Sri Lankan economy. He pointed out that there were no such drawbacks at present.

“Our debt is 76% of the GDP. We are a complete outlier when it comes to debt. Debt servicing is almost 100% of the GDP. We are basically borrowing for all our expenditure. That is not a very resilient situation to be in. What that really means is you have no cushion.”

Dr. Coomaraswamy said Sri Lanka had done the opposite of what successful countries in East and Southeast Asia had done. Those countries had robust fiscal outcomes, low inflation, low interest rates and undervalued and competitive exchange rates. 

“Sri Lanka did the opposite as a result of unsustainable budget deficits which pumped excess demand into the economy. When there is excess demand in the economy, there is also a higher propensity to suck in imports and that in turn exerts pressure on the balance of payments.” 

This most urgent challenge, he argued, was not possible through the reduction of total expenditure, though some wasteful expenditure such as losses in State-owned enterprises were needed. On the other hand, development expenditure had to be increased to enhance growth and the competitive capacity of the country through investment in high-quality education and improvements in health. 

FTAs and location to spur export sector

Dr. Coomaraswamy stressed that the Government’s commitment towards new comprehensive partnership agreements with China and Singapore along with its attempts to invigorate Free Trade Agreements with India and Pakistan would perhaps have the greatest potential to truly shift the needle in terms of exports.

“If we can get all these agreements on board, by next year this time Sri Lanka will have preferential access to a market of about three billion people,” he added.

He explained the toxic combination of populace politics and a deeply-entrenched culture of entitlement on the part of the people as a key phenomenon which had led to a slowdown of the country’s economy. 

Although it is a phase where the global economy is experiencing sluggish growth coupled with low international trade, Dr. Coomaraswamy asserted that Sri Lanka’s favourable location and excellent international relations with many countries would triumph in the current global context.

“The assets Sri Lanka has in terms of location are immense. All in all we have an opportunity to grasp in order to create a new age for the country,” he pointed out. 

Education, training and skills

Dr. Coomaraswamy noted that education, training and skills development were a critical strategic challenge as Sri Lanka no longer could drive growth by augmenting labour.

“The strategic challenge is to align the comparative advantage of the country, the labour market and education, training and skills development much better. Given the current fiscal constraints, public expenditure on education is getting squeezed, particularly as there is this, a much needed focus on infrastructure,” he explained.

He also emphasised the need to have the fiscal space to take care of Sri Lanka’s rapidly ageing population.

2017-2018 bonus years

The Governor was hopeful of an improvement in the balance of payments and the foreign debt situation as there was no maturity of foreign loans in 2017 and 2018 and a surplus in the current account is expected this year. He described the next two years as “bonus years” that would enable an easing of the external debt burden.

“This is an opportunity for the Government. I think we are about to get some relief, some space for liability management. Hopefully what the Government might be able to do is gain a little bit of space, because there is no sovereign bond due for repayment this year or the next. So what we want to do is try to use this money to do some liability management to push out the tenor of some of the sovereign bonds which are coming due in successive years from 2019 onwards. For five years, except for one year, I think we have to pay at least $ 1 billion in sovereign bonds which are becoming due,” he said.

Budget 2017

Dr. Coomaraswamy was also optimistic about Budget 2017 taking the first tentative steps to increasing direct taxes by simplifying the system and drawing more taxpayers into the net. Once public revenue increases the Governor was optimistic his job would become easier as policies could be made more consistent through stronger links between the Central Bank and the Finance Ministry. 

“It is a lot easier to deliver low and stable nominal interest rates and a competitive and stable exchange rate if the fiscal outcomes are not part of the excess demand pumped by debt to the system. Hopefully as fiscal consolidation takes place monetary policy and fiscal policy can deliver those outcomes,” he said, adding that the Government was striving to set stable interest rates in the medium term.    

Way forward

The Governor said bringing down the fiscal and trade deficits, reducing foreign debt, increasing exports, developing scientific and technical education and fostering an economic policy environment of certainty and predictability are key strategies for accelerating the country’s growth momentum as Sri Lanka is trumped by the location factor.

“Clearly the model we try to get through is private sector driven with FDIs as the key pillars,” he added.

Focusing further on a positive narrative, Dr. Coomaraswamy pointed out that there were ongoing efforts to improve investment attraction, the ease of doing business, trade policy and trade facilitation.

“Of course, we would like to go it a little faster, but the direction is positive,” he said. 

Pix by Lasantha Kumara

Coomaraswamy clears forum’s fiscal policy doubts

Central Bank Governor 

Dr. Indrajit Coomaraswamy’s keynote address at the CEO’s Breakfast Forum was followed by a lively Q&A session moderated by Daily FT Chief Editor Nisthar Cassim. The following are excerpts.

Q: Ever since we liberalised our economy in 1977, governments have pursued an export-led economic strategy. What gives you the confidence that this approach by the current regime will work?

A: Earlier we had a very high war risk premium attached to the economy. The initial focus was very much on domestic infrastructure. We have dynamic relationships with other economies and a new trade agreement. The fact that partners such as India and China are growing at a faster pace augurs well.

Q: You said the private sector cannot operate in way that is business as usual. In the next two years the domestic private sector has to drive growth. Do you think the Budget has really set the stage for that in the next two years? What other conditions do you think the private sector needs to have?

A: The target of the budget deficit has come down to 4.6%, which is an achievable target and I think that is a very positive indicator in itself for the private sector. I think the Budget has also struck a balance for some sectors like SMEs and Agriculture with an inclusive approach. The binding constraint for realising a successful development model is improving human capital. That’s where there is a real challenge in terms of aligning our education, training and skills development with the needs of the industries. 

Q: What plans does the Central Bank have for start-ups?

A: Before I was put to this job I was an advisor to the Minister of Development and Trade and there is a World Bank project looking at part of overall SME development as well as the ecosystem for start ups. They were actually very impressed, particularly with IT start-ups. 

From the Central Bank’s perspective there is one program where the Government is giving Rs. 4 billion for a SME development program, which will be divided to all parts of the country and particular emphasis will be given to start-ups. Small-scale and micro-scale entrepreneurs are given grants worth of Rs. 50,000 as an initial investment.

Q: It was pointed out that black money helped India overcome the recession. Are we also thinking about demonetisation? 

A: I still haven’t thought about it. At the moment, we need some quietness and stability. We need our private sector’s animal spirits to get activated and open their wallets. In this process if you start changing too much the momentum will be disturbed.

Q: What was the rationale behind the implementation of loan to value (LTV)? We saw this in the Budget restricting the automotive industry. 

A: The rationale for macro credential measures is essentially to cool down the demand in that particular sector. As you all know, there was very sharp growth in motor vehicle imports in 2015. This was when the macro credential measures were introduced and now I guess they are being fine-tuned. 

Our balance of payments (BOP) this year is better than last year, but we are still not out of the woods and we are not earning enough export income at present. Therefore, this was a measure to curtail our non-essential imports.

Q: Could you please comment on the proposals pertaining to the banking sector and directing lending for specific sectors and FTL?

A: In terms of directed lending, I read somewhere that the Minister himself had said that it was more towards moral suasion and used as a guideline. My overall view is that directives for banks or the guidelines have not been successful in Sri Lanka but at the same time the Government needs to channel money into those sectors. In that context, the Central Bank will certainly help the country. 

However, the banks need to work this out in the end. What we don’t want to see is non-performing loans (NPLs) going up. I think within those parameters we would certainly encourage the banks to lend to the sectors mentioned by the Government.

Q: I think one of the issues that we have is the lack of consistency in terms of policymaking. On the one side we have development plans, but do we have the resources to implement them? What are the measures being taken to support the growth of exporters?

A: In terms of how these major development programs are going to be financed, the idea is essentially to get private local money as well as foreign money. There will be public-private partnerships, but much of it is going to be foreign direct investments (FDIs). 

In terms of the trade policy, certainly these trade agreements are part of the trade policy and the Government is also in the process of developing a national trade policy framework. I think the draft has already been shared among the stakeholders and it is being improved further. My understanding is over time these para-tariffs will be reduced. In the modern world it is important to create an environment to plug into the value chain and entrepôt business. In terms of overall policy inconsistency, if you look at it properly much of it stems from the problem of cash flows in the Budget and the BOP. When the Government is short of money in the Budget it slaps some tax on various sectors, which disrupts the business climate. Equally, we put macro credential measures on the BOP. However, the significant outcome of policy volatility comes from the cash flow problems in the Budget.

Q: The Government seems to be encouraging a lot more FDIs, but at the same time they are withdrawing some of the concessions available to local investors in terms of tax holidays. You also mentioned that it is the domestic private sector that should drive growth over the next 2-3 years. This gives mix signals to the private sector. What would the Government be looking at doing to encourage a bit more certainty and encourage the domestic private sector to embark on these investments?

A: My view is to have similar exemptions for domestic and foreign investors. The idea is to shift away from tax holidays largely because of the Government’s revenue problem and to move to upfront investor-related incentives. 

When there were too many leakages through tax holidays, the Government was not able to capture any revenue from the growing sectors of the economy. In the 1970s and before that the main source of Government revenue was from the plantation sector, that’s why they got all those tax exemptions, but that sector no longer has a surplus. This was one of the key reasons the Government had got stuck on the revenue side. 

The other thing is this: if we collect more revenue and run a better Budget, which doesn’t place excess demand on the system, you as manufacturers would have lower interest rates and more competitive exchange rates. 

Q: So your outlook is that you expect a lower interest rate regime?

A: I cannot promise things because I have had bad experience predicting it. I spelled out at a forum that the interest rates were okay but three weeks later we had to increase it. Of course, you cannot tell what’s happening in the world, but provided that the Budget is in order and revenue targets are met then there shouldn’t be pressure on the interest rate. 

Q: Do you think looking outwards right now is the right strategy in a less consistent and unstable world?

A: As I said before, there are inflows with capital surplus countries and these are countries with which governments can develop partnerships. You know 65% of global growth going forward is going to come from China and India, and we are going to have preferential access to those markets. I am not saying that we have got to ignore our traditional markets. We need to consolidate and do what we can do. However, the real opportunity is in Asia. There will be turbulence in the West but we still have a chance. 

Q: Am I right to say that in the past monetary policy was driven by a political agenda? Or in other words the Monetary Board didn’t have the independence to act on its own or execute the monetary policy in a prudent manner. Do you see that climate changing? Do you think that you will be able to make a change where the Treasury boys will not be able to put their hands into the cookie jar? 

A: I think you are right in the sense that we had fiscal dominance. In my position I don’t want to talk about a political agenda, I will call it fiscal dominance. At the Monetary Board we are keen that fiscal dominance should end and we are keen to move towards a more forward looking monetary policy in the medium to long term, so that we move quickly. 

In the past we tend to wait and see what we like to do and what we are determined to do. Already a lot of work has been done in moving towards a more flexible inflation target. We still have some more work to do in terms of building up our model and our people’s skills but we want to move towards a more flexible inflation target. We want to create a good framework for monetary policy.

Q: You mentioned that the private sector cannot go back to business as usual, but the perception from the private sector is that it has been politics as usual. What advice would you have for working in both sectors? What part should the private sector play in this?

A: What one needs to change in my view is the extent to which politics drives into the private sector because politics will always drive into it, but to what extent it will drive into it will make a difference. In Sri Lanka politics has been overdriven but I think we can redress that and balance it by paying greater attention to the economy. I think the private sector should make it clear to politicians as many times as it can because it funds the politicians. I don’t understand why the private sector doesn’t do so in redressing the balance in economics and politics.