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Wednesday, 8 March 2017 00:00 - - {{hitsCtrl.values.hits}}
Refuting speculation that the country is experiencing an economic crisis at present, Deputy Minister of Public Enterprise Development Eran Wickramaratnehowever predicts a debt crisis from 2019 to 2022 due to the annual debt repayment of $ 4 billion.
Explaining the Government’s efforts to stabilise the economy which has experienced a gradualincrease in debt repayment, from only $ 500 million 10 years ago, he claimed that during the last 10 years the country’s economy had been managed extremely poorly.
“Debt repayment has seen a very quick rise in a 10-year period. The debt repayment has risen from $ 500 million to $ 4 billion – ithas gone up 800% in 10years,” Wickramaratne said in an interview with the Daily FT.
He said the Government, which had stabilised the economic situation, had a very clear road map on fiscal consolidation and all external agencies in the IMF had recognised the Government’s stance.
Following are the excerpts of the interview:
By Shanika Sriyananda
Q: What is the state of economy in the country at present?
A: The Government inherited an economy which was in an absolutely poor state. It had huge twin deficits – budgetand current account deficits. The Government had been excessively borrowing and in that previous period foreign currency borrowing had gone up tremendously to nearly half of the total borrowing in the country from a very low base. It is nearly about 45% now but it went up from a very low base quite rapidly.
What happens when foreign currency borrowings go up is the risks increase within the borrowing, which can’t be measured only in terms of the percentage of the GDP because there have been instances when borrowings had been 100% of GDP and it has come down today in its 70s as a percentage of GDP. It should be measured in actual risks.
The other risk of foreign currency borrowings and the shorter tenure borrowing have been lower. Instead of having concessionary long-term debt or 20-30 years you will suddenly have deficits like three years, five years and seven years. The crisis can be seen in that the debt repayment is going to bunching quite considerably.
From 2019 to 2022 the crisis will start and in each year the debt repayment is $ 4 billion. Even in 2005, 10 years ago, it was very low. Then it ramped up. Ten years ago debt repayment was $ 500 million and it was ramped upto $ 4 billion. In the last 10 years the country’s economy has been managed extremely poorly. Debt repayment has seen a very quick rise in a 10-year period. Debt repayment has risen from $ 500 million to $ 4 billion – it has gone up 800% in 10years.
This is the debt repayment which is the interest and the capital repayment. It is not only the debt numbers that matter but the debt repayment that matters. If your incomes and foreign income are not growing at this pace, then there will be problems.Foreign income didn’t grow at this pace because generally exports under the previous regime were stagnant and only thing that had some growth were remittances that came from Sri Lankans working overseas. This just demonstrates the problem that we have inherited.
Then the new Government came in and our first priority was to stabilise the economy. The earlier Government knew that there was a problem coming and that is why the then President Rajapaksa went for an election two years early. He went ahead because of the economic crisis that was looming. They didn’t have a strategy. Their strategy was to borrow more to pay their way out of the crisis. We came in and we could not do the same. If we had continued to do the same the country would have gotten into a deeper problem and at some point there would be a default. We have come in and one of the things we have done very successfully is fiscal consolidation, which is trying to minimise wastage and corruption.
I will say that we are not totally successful but there is an attempt to reign that in. Because corruption is often not something that people think it is. Some politicians have a hand in the till, butcorruption is a systemic issue. For example, when a person says that he has gone to a local Government institution to get a plan passed and had to go there several times, one might say ‘if you can make a payment, you can get it done’.
These accusations are made against law enforcement authorities and businesses from which one has to get permits andapprovals. One of the shocking incidents I have heard recently was from a very reliable source where in one of the leading schools in Colombo the teachers were expecting payments from parents to give special attention to their children. What it demonstrates is systemic corruption; people find that to make processes work you have to oil the machinery. It is very troubling and we need to correct it.
The other side of fiscal consolidation is revenue. The Finance Minister has been successful in revenue collection. When we took over revenue collection was 10.5% of GDP. It reached 13.5% at the end of 2016. By the end of 2017 it is expected to go up to 14.5% plus. Revenue levels dropped to very dangerous levels during the past regime and the Government needs to maintain revenue to ensure Government services.
The other thing is the current account deficit, which willimpact on reserves. Sri Lanka’s reserves are reasonable but not strong enough. One way to grow reserves is through exports and they are increasing rapidly. The other is Foreign Direct Investments. Our Government is placing emphasis on exports but it will take time for new industries and SMEs to get themselves geared to exports. But the policy direction is clear. One of the things is that by doing it, we have accepted the policy that the exchange rate should be market determined but not be artificially managed. This is why we now have a market-driven exchange rate. If we look at it, we had a crisis and we have stabilised the situation.
As somebody said, earlier the patient was in the ICU and we have taken the patient out of the ICU but he still needs to be attended to in a hospital ward. We are hoping over the next period to get the patient into the sunshine, into the park. That is the kind of transition that we are really looking at.
Q: You mentioned that Foreign Direct Investment was low. What is the situation now?
A: Yes, in terms of Foreign Direct Investment, it has been low. It is also to some extent in keeping with what is happening globally. The global economy and Asian economy have slowed down. Therefore, investments have also moved from some developing markets to more established markets during this period.
In 2017, people were waiting and watching what would happen to the US, who would become the president, what would the interest rate strategy be. Uncertainty has been there in this period. In 2017, Sri Lanka’s Foreign Direct Investment will change positively. We are on the verge of finalising projects in Hambantota. One is Hambantota harbour. When the Hambantota harbour projectis signed within a six-month period there are three payments, including a payment which is to be paid with the signing.
Q: What is your prediction of foreign exchange coming in with the Hambantota harbour project on ground?
A: This year we will see a large inflow of foreign exchange coming in through the Hambantota harbour project. Once this is signed then we will know specifics of the industrial and export zones in the south. Because once the harbour is converted into more an operational transhipment kind of a harbour, then we are expecting other investments to come in and that discussion is also going on. So there will be other investments also flowing in.
I would say most of the harbour investments will be seen in 2017 and most of the other investments will be seen in 2017 and 2018. The direction is clear and the FDIs will come in.
The other fact is the Cabinet has just approved a sovereign bond. We will be going out into the market within the next few days. We will be concluding the sovereign bond within weeks in raising capital. Then we will have an excess of another billion dollars. With just those two transactions alone we are going to have more than $ 2 billion coming in.
Q: Do you mean to say that Sri Lanka is not facing an economic crisis?
A:Yes, that is why I could say that Sri Lanka is not in an economic crisis. Sri Lanka was in an economic crisis. We have stabilised the situation. We have a very clear roadmap on fiscal consolidation and all external agencies in the IMF have recognised that. Now we have a plan for improving the foreign exchange and reserves situation and therefore I would say as the year progresses the exchange rate will stabilise. It will be clear once dollars are coming in. The turning point was 2017. We are out of the crisis. The challenge for the Government is that the economy has to be carefully managed from 2019 to 2022 at the height of debt repayment.
Q: Do we have a high inflation rate?
A:It is under control. Core inflation in last year was 6% in comparison to about 4.5% in 2015. But that increase can largely be explained in terms of one-off adjustments because of the tax increases. Once that is made, it will come down this year. We expect inflation to be between 4.5% and 6%, it will settle somewhere in that range. So inflation is also in check because large one-off adjustments have already happened in the previous year.
Q: What is the role of the banking sector for the economy to expand?
A:The banking sector is critical when it comes to economic expansions. Some new rules like BASEL III, which means a higher core capital requirement, are coming in. When that is implemented in Sri Lanka, the banking industry will be short of capital. In banks the largest amount of funding comes from depositors and only a small amount comes from the shareholders. The banks are different to average companies in the way they operate. The Government will open up the banking system as a policy for further investment in the banking system. As it is a very carefully regulated financial system, there are only two choices – the Government has to put in capital or it has to be opento other parties putting in capital.
The Government has stakes in private banks as well. Over a period of time, it will invite others to invest. But there are a few things we need to keep in mind. We need to tighten the regulatory framework. We donot want the banks to be controlled to the detriment of depositors by any single party. Already there are rules – ownership of a bank is 10%, with the permission of the Monetary Board it can own 15%. These rules already exist but we will tighten the regulations to ensure independent professional management decisions in the bank. The reason to be cautious is not to have related party transactions. That is for example the owners borrowing from the banking institution. While we look at the way to liberalise ownership we will tighten regulations because we want to have a strong and healthy banking system. The country’s progress depends on the country’s banking system.
As State banks will also be short of capital, they will have to focus on their core businesses over this period of time and they will have to put all the capital they have from non-core businesses into core business which is banking business. Otherwise, the State banks will not be able to grow. The credit growth of the State banks have to go in parallel with their capitalisation. These are the challenges for the banking system but ifyou ask me to name one single challenge in the banking sector, it is the shortfall in capital.
Q: Can you outline reforms in lossmaking State-Owned Enterprises (SOEs)?
A: The State has more than 250 commercial State-Owned Enterprises and one of the things we are doing is separate the commercial objectives from the social objectives. If we are going to achieve social objectives using SOEs, they must be separately identified and recognised and they have to be funded through the country’s budget.
The commercial operations of the SOEs are not to be subsidised by the taxpayer. Otherwise, they are going to make a huge loss where only some people benefit but everybody is going to pay. It is not socially justifiable. For example, if you subsidise petrol, you are really benefitting those who use and ownpetrol vehicles. But all taxpayers are going to pay. Is that fair? If you subsidise kerosene, which is used by low income groups, that will be socially justifiable. Therefore all subsidies are not justifiable.It depends on to whom the subsidy benefits. Another example is the airlines. If the State-owned airline is making huge losses and it has to be subsidised with taxpayers’ money, then everybody is paying but a few are flying. Is it fair to subsidise?
When speaking about reforms, as I said before, we need to separate the commercial objectives from social objectives. Social objectives may be very valid but they need to be identified, recognised and calculated and need to come in the budget of the country.
But SOEs need to be run commercially by eliminating losses. We will bring in the Public Enterprise Law to make sure that the objectives of the SOEs are identified, they can be professionally managed with fit and proper persons who will be appointed to the boards of the SOEs and political interference will be minimised. The law is still at discussion level.
Q:What is the progress so far in restructuring the already-bankrupt SriLankan Airlines?
A: When we took over the airline it was making losses of about Rs. 30 billion. In 2015/16 we brought it down to about Rs. 12.6billion. The total loss in 2016/17 will be Rs. 22 billion, which includes the one-off charge of the cancelation of the A350 aircraft, which is Rs. 14 billion. This is the payment for the cancelling the agreement for four aircraft, which were contracted by the previous regime.
The contracted value was $ 1.4 billion for an aircraft and the current market value is $ 900,000 to one million a month. The airline losses $ 400,000 to 500,000per aircraft per month. When you take this into the 12-year contract period, the amount will be massive and one aircraft will be $ 200 million. This has to be calculated into four aircraft which had done in two separate transactions.
If we kept the contract going, the cumulative loss would have been in far in excess. These are commercial decisions that the airline has taken and they have a basis for taking this decision. This is one-off payment and after that we will run the airline more operationally. Investigations on these contracts are going on with the CID. This was came out in Weliamuna Report.
In restructuring the airline, they have done a route rationalising more into a regional airline. The fleet rationalising is another step taken to restructure the airline. Here the correct aircraft are being taken to fit this strategy.
SriLankan Airlines needs capital as all these aircraft are taken on leases. Therefore we need to bring in a partner.A reputed airline investor, Texas Pacific Group (TPG), which was launched in 1992 with the buying of Continental Airline in 1993, will be the partner of SriLankan Airlines. TPG has invested in many airlines including American Airlines, Ryan Air and Mid-West Airlines. It was among the shortlisted bidders for SriLankanin 1997 but we went for the Emirates partnership. Today, TPG owns direct and indirect stakes in several leading airlines.Its experience in turnaround situations is very wide.
If the solution to the SriLankan Airlines situation needs more than one party, it is TPG and we can always bring in another into SriLankan Airlines. The SriLankan Airlines matter is moving forward.
Regarding other commercial enterprises like the Hilton and Hyatt, in which the Government has no realstrategic reasons to have all the stakes, we will open up to the public. How the transactions will be done depends on each institution and the nature of the industry. Each will be done separately in a transparent manner.
