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However to become the much talked of ‘emerging wonder of Asia,’ the country must shed its coat of 5% to 6% growth and put on a new coat of 8% growth; a possibility for Sri Lanka in the current context. “It is only then can we speak of emerging as a wonder of Asia,” IMF Resident Representative Dr. Koshy Mathai said.
Addressing the 94th Annual Colombo Rubber Traders Association AGM on Friday, Mathai noted that even though the country has adapted some good macroeconomic fundamentals, to get back to 8% growth there needs to be changes in the current policies of the Government. “To achieve 8% growth, there is a requirement for changes in policies. It is absolutely within the realm of possibility to get to the 8% but not with the current policy settings.”
Listing out what the IMF has in mind to boost long term growth, Mathai noted that the primary need is to increase investment. The Government has done a good job in the last few years protecting public investment in the budget he said, but in comparison to other countries, Sri Lanka’s public investment comes woefully short. “Countries like China invest close to 20% of the GDP every year in investment; that is very large and may not be a fair comparison,” he acknowledged. “However there are plenty of countries that invest more than 6% of GDP which is what this Government invests. Even though this is an improvement over the past, there is still room for improvement.”
Investments need to increase, he reiterated. “We need more infrastructure and investment, and we need the private sector to increasingly get involved in that process. It cannot be solely a governmental process.”
Sri Lankan financial markets must also develop in line with such investments. A key issue here is the lack of a corporate debt market. However Mathai admitted that positive changes have been signalled this year. A whole lot of corporate debentures have been issued, which is a good thing because banks don’t issue long-term finances at the moment. “If a company needs to make a major investment, banks don’t give it, there is no corporate debt market and you have to pretty much use the funds of your own. Therefore getting the corporate debt market going is a major priority.”
Another factor to note is the improvement of the stock market, not just increasing the market capitalisation, but also improving the depth of the market.
There are very thin volumes being traded he said, very poor price discovery and a whole lot of manipulation, at least in the past. There is a need to develop that, strengthen the regulation of the market and broad-base participation so that more and more people would invest through unit trusts, etc; to ensure a more efficient financial process in the country. “Savings can be allocated to right investment uses in a more efficient way. Financial development is another.”
Mathai also commented on developing the educational system in the country. “Sri Lankans like to boast about high literacy rates but high literacy rates will only take you on a very limited distance. You also need English skills, IT skills, university education for managers and vocational training and more,” he said.
In modern economic history, openness to the rest of the world is a pre-requisite for sustained growth, especially for a small country like Sri Lanka, he reminded. In practical terms this means the country needs to boost exports. Exports have declined steadily in this country for the past 15 to 18 years and a boost in this regard is a must for progress to happen.
“One thing we all need to look at more, is the country to the north of us. We have a massive market there, which increasingly rich and growing very fast, with extremely low shipping cost, cultural similarities, and ease to do business for Sri Lankans.”
A free trade agreement is already in place and whatever the controversies are of the CEPA, the country must look past the name of the agreement and engage more with India. “You must move to a broader integration with India in terms of services, investments, movement of people, etc.”
Aside from the regional orientation of trade, value addition is also an area to be concentrated. “You (the rubber industry) have done great things. You have made surgical gloves, and occupy a 40% world share of solid rubber tyres. We need more success stories like that,” Mathai said. “Look to new markets, look to value addition and we in this economy will have lot of success.”
He added: “It is only then we can talk about emerging as a wonder of Asia. Only then can we become the wonder of Asia.”
However Mathai, while noting the positive factors of the local economy, stated that certain macro fundamentals undertaken are “actually good” with the growth rate surpassing the average developing economies rate of 5.5%.
He acknowledged that the country has low inflation although the cost of living remains high with the majority finding it difficult to afford basic items. However Sri Lanka has not done well in the past in managing its debt ratio even though the country has come down to 80% from over 100% of the GDP. The reason for the high ratio is not the expenditures but on the revenue side. “Taxes as a percentage of GDP are 11.5%, one of the lowest ratios in the entire region. We are in league not with the countries we are trying to emulate such as Malaysia, Thailand and Singapore but rather in league with Bangladesh, Pakistan and Philippines.”
He stated that IMF would like to leave revenues in the hand of private sector so that the economy can develop. “We do have a governmental circumcise here which is not that big compared to most countries. We need to get the revenues up, if not we need to print money or borrow or borrow internally, all of which are difficult. Getting the revenues up is a key priority and should be one of the main focuses policy makers should be looking at in the next few years.”
On the macro front, coverage of reserves is also important. Dollar reserves of the CBSL are critical to protecting the value of the exchange rate. “We had a lot of fluctuations in the last few years. Good news is that reserves are at relatively high levels, we are at much higher levels in fact from where we were just a few years ago. The bad news is that reserve values are still not high enough.”
Noting that the world is still an uncertain place, Mathai expressed that the market developments in the last month is a clear indicator. All it took was for Ben Bernanke to make some very mild comments about the positivity in the changing US monetary policy some months along the line, and markets went in to a tizzy, he said. “Capitals started flowing, interest rates started changing and exchange rates came under a lot of pressure. If that sort of things happened on a sustained basis it is important that governments and central banks have enough dollars on hand in order to keep that currency strong.”
Building reserves further therefore is a key, Mathai noted. “This is not about borrowing money to build reserves but boosting exports, cutting imports, making the economy more productive so that it generates more dollars so that it can be saved.”
Sri Lanka’s macroeconomic picture is much improved, he said. “However there is still a lot of room for improvement in many of these fields.”
