A Simple Plan for Sri Lanka

Tuesday, 20 August 2019 00:00 -     - {{hitsCtrl.values.hits}}


  • Following are excerpts of an interview with the author of the recently-published book ‘A Simple Plan for Sri Lanka,’ Waruna S. Singappuli CFA. The following is how he summarises what this book is about:


Q: What made you write this book?

I thought my experience in analysing the Sri Lankan economy and companies and studies done on global economies and companies should be utilised for the greater benefit of the public.


Q: Why is this book different?

 What we always hear is criticism of how Sri Lanka is governed. Many are very eloquent in criticising how things are done and sometimes people get very impressed with such criticism. But the critics don’t give a practical solution. 

What we hear are fairy tales – corruption would be stopped, stealing would be stopped, stringent laws would be introduced, efficiency would be improved, etc. But these are not well thought out detailed plans. So it’s unlikely the country would benefit much from these slogans. In fact, most of the issues that are pointed out are just symptoms and not the root cause. One should address the core problem and not the symptoms. This book tries to offer a practical solution to correct the core problem.


Q: What’s Sri Lanka’s core problem?

 What I’ve tried to point out in this book is the core problem faced by Sri Lanka is the poor economic growth – the fact that income is low for everybody and more importantly, the fact that there is little hope of a significant improvement in income. This is a key trigger for all other problems – corruption, stealing, debt, inefficiency, racism etc. 

What we should understand is, no country wiped out corruption, debt, inefficiency and all other vices and developed thereafter. What actually happened was, when each country gradually developed economically, all other issues got rectified gradually and automatically. In other words, if you address the core problem, the symptoms will disappear gradually. 


Q: What’s the appropriate level of growth for Sri Lanka?

 All the countries that developed in the recent decades did so by achieving an annual growth in excess of 7% for about 30 years continuously. That’s what we need to do as well. We have never achieved an average annual growth of over 7% for more than five years continuously. 


Q: Wouldn’t the sole focus on growth affect other economic variables?

 Precisely. A good plan should always identify the opportunity costs – or what you have to let go to achieve something. For example, one cannot be both a doctor and an engineer, can one? That’s why the plans we usually hear are not practical, as they claim to improve everything which is simply not practically possible. Such approaches result in little or no progress in everything, which is similar to what we have witnessed over the last 70 years. 

So what I’ve tried to argue in this book is, in the quest to achieve high growth, we may have to let certain other indicators such as budget deficit, rupee debt and inflation deteriorate slightly in the near term. But once the country gets into a sustainable high growth path, one could shift focus to rectify those issues. Then the country would be in a lot more stable footing to address those aspects. 

I believe five years is a sufficient time to set the country on a sustainable high growth path. 


Q: What do you propose the people and politicians do?

 The whole objective of this book is to propose a different approach for both the public and the policy makers. Public should demand for such measures from the policy makers (rather than the traditional demands) and the policy makers should come up with practical plans along these lines and implement those. Instead of coming up with ill planned, unimplementable, wish lists which invariably fail to deliver.

It’s time that both the public and policy makers realise that short term sweeteners such as increasing Government salaries or reducing costs of goods arbitrarily, would only make things worse in the future, in the absence of a proper plan which would gradually boost income levels and stabilise the prices.


Q: What’s the plan proposed in this book for Sri Lanka?

 This book argues that the starting point should be the foreign policy or to prudently utilise the geopolitical factors. In today’s global economy, no country can develop on its own. Specially a small country like Sri Lanka, where the domestic market is too small. But fortunately we are in an enviable location, where the two global giants China and USA are showing great interest. While we haven’t exploited that competitive advantage at all, I argue that could be the main factor that could unleash Sri Lanka. 


Q: How should Sri Lanka exploit the geopolitical advantage?

 The fact that China and USA are interested in Sri Lanka means we possess something of value to them. While we have been reactive all this time, we need to be proactive instead. So we should demand things that are of value to us, in return for giving them what is of value to them. When I say “give them”, we should make sure we don’t give anything that would be a lot more valuable to us in the future (than it is now) and also ensure that the national security and sovereignty is not affected in a material way. 

We should also be realistic to understand that there is nothing free in this global economy. For us to obtain things that are of value to us, we need to give things that are of value to them. It is illogical to blindly hold on to assets which could be traded for more useful and relevant assets for us.


Q: What should we ask from USA and China?

 This book explains that we need to ask China to invest in specific industries and not exactly the infrastructure such as roads or other soft aid such as ambulances, etc. I’ll get into what these specific industries are, later. In the case of USA, we need to ask to be made a “favoured nation”, so that products (or services) from the above industries could enter the US market at lower tariff rates. 


Q: Is this doable?

 Of course. This book refers to the recently developed countries such as Japan, South Korea and Taiwan. They penetrated the US market through “preferred nation” status. For instance, Hyundai is a great example as to how technology was acquired by Japan to penetrate the US market. In return, they had to side with USA and against communism at that time. There are US military bases in some of these countries. 

I’m not saying that we should allow any foreign military bases in Sri Lanka, but we should be aware that the countries such as Japan and South Korea where thousands of Sri Lankans live, there are US military bases. I don’t think that has affected the sovereignty of those nations. They disagree with USA on many matters. 

On the other hand, the price USA had to pay was that Japanese automobile makers beat the US automobile makers in USA, and Samsungs captured market share in USA from the likes of Apple, etc. So USA also had to pay a substantial price in economic terms.


Q: But traditionally we look at USA with suspicion?

 Yes, but that’s being ignorant. Many talk about the negative impact of USA on Iraq, Libya and Syria, but don’t talk about the positive impact on Japan, South Korea and Taiwan. In fact, the currently fast developing countries such as China and Vietnam also benefit greatly from USA. 

This book points out that USA gives Sri Lanka a trade surplus of about $ 2.5 billion every year, which means USA is one of our best customers, if not the best. In contrast, we have an annual trade deficit of almost $ 4 billion with China. It was less than $ 1 billion of that, which was returned to us to acquire a majority stake of the strategic Hambantota port! 

This book does not try to find fault or side with any country. But it argues that every country strives to do what’s best for them. Sri Lanka has to do the same and be smart enough to get what’s best for us from foreign nations.

In fact, the recent US concerns may have a lot to do with the acquisition of the majority stake of the strategic Hambantota port by China, in addition to the presence in the port city in Colombo. Sri Lanka has to relook at the Hambantota port deal and renegotiate under better terms as it’s a long term strategic asset for Sri Lanka. That itself could boost the negotiation process with USA.


Q: What would be the final outcome of your proposed foreign policy?

 We should start negotiating with both these powers and let them know what exactly we need. Then we would see how much they are willing to give and in return how much they demand from us. We should clearly draw the line as to what we could give without materially affecting our sovereignty or letting go of long term strategic assets. 

This book doesn’t give a final solution as that would depend on how the negotiations proceed. It could be well balanced, or it could be tilted towards one side based on how much they are willing to give at a reasonable cost to Sri Lanka. 

The current trade war between USA and China is an excellent case study. The negotiations have been going on for over a year and still it’s not clear as to how it would end. But permanent changes have happened, and a finality could be expected within another year or so. 


Q: Is there anything else the Government should do, other than the foreign policy?

 What I’ve tried to explain in this book is that the change in foreign policy is just the start. Simultaneously, the Government should decisively support that strategy through the Government budget. That would give comfort to the counter parties China and USA that we are serious about our plan.


Q: But isn’t the Government short of money?

 As I said, the primary problem for Sri Lanka is to revive growth in a sustainable manner. The excess of Government expenditure compared to its revenue is a secondary problem. By trying to solve the secondary problem, we have aggravated the primary problem and in the process we have not made any progress with the secondary problem either.


Q: Do you mean the fiscal consolidation strategy is not right?

 The IMF prescription has been to increase taxes and control expenditure so that the excess of Government expenditure compared to revenue would reduce. But what has happened?

What I’ve explained in this book is that the increase in taxes and the reduction in Government capital expenditure have halted the economy. That’s the prime reason for the growth to be around 3% (or less) in recent years. When you step on the brake, the car slows, and not accelerate – it is that simple.

When the economy slows, the Government tax revenue also reduces. As a result, the excess of Government expenditure compared to revenue has not improved. So the desired outcome has not materialised anyway. Therefore we are in a vicious cycle of low growth and high budget deficits.


Q: Then how can the budget deficit be narrowed?

 What I’ve tried to explain in this book is that it can’t be done by a primitive measure like increasing taxes and controlling expenses. That’s just not sustainable. It has to be done in a more methodical way. The country should first get into a sustainable high growth path. Then only the attention should move to reduce the budget deficit. Right now the priority should be to reduce the external current account deficit and not the Government budget deficit.


Q: Why is external current account deficit more important?

 All our exports including tourism, software and services and worker remittances are still around $ 2.5 billion less than our annual imports. Basically, it’s that difference that we need to annually borrow in foreign currency. That’s why our foreign currency debt keeps on increasing. That is a serious problem as foreign currency is not within our control.

This book argues that the Government budget deficit which is in rupees is not so much of a problem, as the Central Bank could print rupees. It’s not the ideal scenario, but it’s much better than the problem of deficit in foreign currency. So a strategy to reduce external current account deficit even if it increases the government budget deficit, should be pursued.


Q: Is this strategy practical?

 That’s what this book tries to prove. After the global financial crisis in 2009, the developed countries such as USA, Japan, etc. let the Government budget deficit expand well beyond 8% of GDP for many years. These countries still run budget deficits. Even the fast-developing Vietnam maintains a lofty budget deficit of well over 6% of GDP over the last decade. But these deficits don’t prevent such countries from attracting investments because the growth is attractive. The desirable investors look for sustainable growth and not so much the fiscal deficit. If the growth is low, investments won’t come in. It’s that simple.

This is true in the private sector as well. Many successful companies had been loss making in the initial years of their operations. But they succeeded in capturing markets and increasing revenue and the investors remained confident. Amazon and Facebook are prime examples. They made huge losses for many years but kept on growing rapidly. Once they reached a substantial size, they focused on financial discipline and profitability. Investors were with them all along.

So basically, growth should come first and then only the budget deficit could be reduced.


Q: How would the expanding budget deficit be financed?

 This book suggests several solutions. What did the developed countries do after the global financial crisis in 2009? They started the so called QE (Quantitative Easing) program – which was basically a case of Central Bank purchasing assets – or providing finance. As I said, rupee debt is not a problem as the Central Bank could keep on printing rupees. So one method is for the Central Bank to invest in long-term treasury bonds issued by the Government. But it is only a temporary (near-term) solution which should be reversed once the economy is on a stable footing.

Another would be to partially or fully sell non-strategic State assets. We should be smart and practical enough not to hold on to traditional assets and instead exchange them for assets such as modern technology which would determine whether we make progress in the modern world or not.

Also, it wouldn’t be difficult to attract investors. If the plan is sound and there is a high chance of the country entering into a sustainable high growth path, both foreign and private investors would rush in. This would be the ideal source to finance the budget deficit in the medium term.


Q: The so-called ‘debt burden’ shouldn’t be reduced?

 Not immediately as per this book, especially in the case of rupee debt. Trying to do it immediately is not sustainable and would only worsen it. 

Take the example of a distressed finance company. A new investor would not be willing to pay off the depositors, although the depositors would demand an immediate return of deposits. An immediate return of deposits is simply not financially viable for a new investor. What’s more practical is to revive the business with new investments and once the company is in a stable footing to gradually pay off the depositors. That’s exactly how the debt problem should be addressed. 

It’s not surprising that similar to deposit-holders, the lenders (banks, IMF, etc.) also demand a speedy reduction in debt levels to simply recover the funds as fast as possible. It should be remembered that a bank (or a lender) is not the ideal party to be advising as to how to run a business. The same applies to a country.

Also many developed countries such as Japan, USA, Canada, France, Italy, Belgium and Spain maintain high debt levels of over 90% of GDP. So it’s not like we are in no man’s land.


Q: Shouldn’t welfare measures be cut to ease budget deficit?

 This is the advice of certain experts. But that’s not practical. Maybe such actions could be taken in a dictatorship. But we are in a democracy and it’s not logical at all to expect politicians to come up with policies that would antagonise a section of the population. 

Anyway measures such as free education and fertiliser subsidy are important to sustain and develop the strategically-important education and agriculture sectors.


Q: What are the industries and sectors that this book proposes to be developed?

 The key thing is to prioritise, as resources are limited and therefore only a few sectors should be selected for focused development. To do that, it’s useful to follow Michael Porter’s Diamond model which advises countries to pursue industries which have competitive advantages compared to other countries. 

In my view the key competitive advantages possessed by Sri Lanka are strategic location, the strong interest of global powers due to that, and the natural beauty. The interest of the global powers could be exploited to promote the strategic SME and Technology sectors. The natural beauty could be exploited by the Tourism sector. The strategic location could be exploited by developing port related industries.


Q: How does this book propose to develop SMEs?

 SMEs should be developed with a view to penetrating foreign markets rather than the domestic market. This includes Tourism sector related ventures such as home stays. The key is not just to provide concessionary loans, such as the initiatives done in the past. The starting point is the foreign negotiations I mentioned before. 

We need to negotiate with China to obtain technology via investments. China possesses a vibrant SME sector – light industries such as toys, etc. The development of Taiwan through SMEs would be a great case study to follow. On the other hand, simultaneously trade concessions should be obtained from developed countries such as USA which would open markets for those industries. 

The Government should support this initiative with the budget. Training institutes should be set up so that the required skill set is available, acquire needed technology, provide tax concessions, concessionary loan facilities and provide any other assistance needed. 


Q: How do you propose to develop the technology sector?

 Once again, the key starting point is the foreign negotiations. Sri Lanka is far behind in terms of technology compared to the rest of the world. Economic powerhouses such as USA and China invest billions of dollars to develop technology and Sri Lanka simply doesn’t possess such financial strength. Therefore the strategy should be to get linked to the technology development processes or value chains of these powerhouses, rather than trying to reinvent the wheel. 

We need to negotiate with China to obtain investments to develop technology related industries. The examples would be the computer manufacturer “Lenovo” or telecom equipment manufacturer “Huawei”. Similarly, the negotiations with USA should be to obtain “preferred nation” status, so that these products/services could penetrate the US market at lower tariffs. 

The Government should support the initiative with budget. The main supporting initiative would be to set up universities, colleges to ensure the availability of required skilled labour. In addition, other support such as tax concessions, required technology and any other assistance needed, should be provided. Another key initiative of the Government should be to bring in regulation to push large scale importers of technological items (such as automobiles, etc.) to continuously add value locally. 

Q: How does this book propose to develop port-related industries?

 The starting point would be to renegotiate the Hambantota port deal with China, so that the majority stake remains with Sri Lanka. Industries such as bunkering and ship building should flourish in the long run due to the location advantage. The effort should be made to attract large global players such as Hyundai and Daewoo. The ownership should be structured in a way that Sri Lanka is entitled to a substantial profit of these ventures.

The delay in the success of the Hambantota port should be compared with other similar projects globally. Jurong industrial park of Singapore is a great example. Despite high expenditure incurred on infrastructure in 1960s, Jurong was idling for many years until the investment by Texas Instruments and thereafter the fortunes changed and the industrial park turned out to be a major success.

The development of container terminals in Colombo port should continue, to benefit from the rapid development of the Indian economy and once again the ownership should be structured in a way that Sri Lanka is entitled to a substantial portion of profits. 


Q: How do you propose to develop tourism?

 What we usually hear is the global promotion campaigns to develop the tourism industry. But what I propose is to develop the tourism product offering. To simplify, we should firstly implement two measures. 

Firstly, develop each major tourist attraction under a unique theme with focus on beauty, cleanliness and safety. A great example is how uniquely and innovatively Singapore has developed its small zoo into a night safari. Sri Lanka has a rich set of attractions in comparison, which could be developed to attract a lot more tourists.

Secondly, triple the capacity of the Katunayake International Airport. Changi Airport in Singapore would be a great role model.


Q: Does this book provide solutions to the problems faced by SOEs?

 Yes, that’s covered to an extent. Financial performance of CEB has always been good during years of high rainfall as the hydro plants are utilised. In 2015, despite low rainfall CEB’s financial performance improved as the coal-based Norochcholai powerplant came into full operation. Therefore to improve performance during low rainfall years, we have to resort to low cost sources such as coal, which should be included in the long term generation plan of CEB. There is always a trade off between development and environment, and in Sri Lanka’s case it’s development that is lagging behind. Timely implementation of such a long term generation plan would be sufficient to improve performance of CEB.

Improvement in financial situation of CEB would automatically help CPC, as the delay in dues from CEB to CPC is what adds to the financial strain of CPC. Also one needs to be realistic that an institution like CPC (even CEB for that matter) shouldn’t function on a strict, consistent profitability motive. CPC provides a crucial functionality to the economy and therefore it is important that the broader economy is somewhat shielded from global shocks such as volatile crude oil prices. So when global crude oil prices are high, CPC may have to incur manageable losses, which should be recovered at times of low crude oil prices. So it should be a longer term pricing formula rather than the short term pricing formula that is in operation right now.

As for SriLankan Airlines, more data would be needed to come up with a holistic view and a way forward. To be more specific, we need to quantify the amount of tourism earnings that is generated via SriLankan Airlines. To put another way, we need to have an idea as to how much of tourism earnings would be lost, if Sri Lankan Airlines operates with a strict financial viability motive. Apart from that, the professionalism of the management could be improved. 


Q: Doesn’t this book recommend an infrastructure drive?

 The Government investment drive should be predominantly to develop the industries I mentioned earlier. Projects such as the Norochcholai and Hambantota port are in line with what is proposed in this book. But certain other projects such as the Southern Highway, although contributing positively to the economy, may not have been prioritised. For instance, if those funds were allocated for a SME sector development, a lot more households would have benefitted. From that point of view, a much worse project that is being implemented is the railway between Habarana to Kurunegala. 

On the other hand, the LRT in Colombo had been delayed for years, possibly because it was evaluated in a primitive way. That project shouldn’t have been justified based on the income it would generate and the project cost. A well functioning LRT in Colombo would have greatly eased the annual vehicle and fuel import bill. That itself would have justified the investment in the LRT in Colombo. This is what I meant when I said that we should remember that it’s the external current account deficit that should be urgently addressed and not the Government’s budget deficit.


Q: Any plans recommended in this book for the private sector?

 Apart from the initiatives I have already mentioned, a key responsibility of the Government would be to guide the private sector to function in a desirable way; especially the larger businesses with stronger capital bases should be directed to create long-term value rather than short-term profits. Therefore while concessions should be given to long-term value adding activities, penal taxes could be introduced for short-term profit oriented and low value adding activities. 

There are few but great examples of the private sector where long-term value has been created, despite the lack of capital. So there’s no excuse for the entities with large capital bases.


Q: What are the great examples in the private sector?

 This book pays a tribute to companies such as Millennium IT, Haycarb, Lanka Transformers, Orange Electric, etc. The individuals behind these companies worked really hard for years and years to add value and make progress in the respective value chains. Unfortunately these are the exceptions rather than the norm of the Sri Lankan private sector. The Government will have to take a more proactive role to guide the larger players in the private sector.


Q: Is the overall plan of the book practical?

 It is difficult but certainly practical. In fact, I have shortlisted just nine tasks for the next president and the Parliament. It is certainly achievable in five years. Even if 80% of those tasks are achieved, there will be a significant turnaround in Sri Lanka’s fortunes. The public would certainly feel it, which means the leaders would almost certainly be re-elected at the end of the five years.


Q: What are the nine tasks for the next president?

 For that, I suggest you read the book. It’s a short book and simple enough for anybody to understand.