Ceylon Chamber Summit puts economy in proper perspective

By Cassandra Mascarenhas

Day two of the Sri Lanka Economic Summit 2012 organised by the Ceylon Chamber of Commerce saw the commencement of the conference’s technical sessions.

The first plenary session which revolved around the theme ‘Sri Lankan Economy in Perspective,’ featured Secretary to the Treasury and Secretary to the Ministry of Economic Development Dr. P. B. Jayasundera as the keynote speaker.

Following his address on Sri Lanka’s current situation in terms of macroeconomic fundamentals from a Government perspective was the private sector’s take on the topic through a panel discussion.

This featured the Minister along with IMF Resident Representative for Sri Lanka and Maldives Dr. Koshy Mathai, Hatton National Bank PLC Managing Director/CEO Rajendra Theagarajah, Secretary General’s Office, Commonwealth Secretariat Former Deputy Director Dr. Indrajit Coomaraswamy, Institute of Policy Studies Executive Director Dr. Saman Kelegama and Nestlé Lanka PLC Managing Director Alois Hofbauer and was moderated by Amana Bank Managing Director Faizal Salieh

The Sri Lankan economy retained the growth momentum in 2011 with a GDP growth rate of 8.3% mainly supported by the industry and service sectors. A greater upsurge was evident in investments with private sector investments rising by over 2% of GDP. Both indicators moved in tandem with the Government’s targets of enhancing investment and growth.

However, an overvalued exchange rate and low interest rates led to acceleration of imports and widening of the trade deficit in the latter half of last year. The currency was defended by use of external reserves. The worsening external payments position and dwindling reserves necessitated the Government to introduce extensive policy changes.

These together with further weakening of the world output growth will lead to a moderation in growth and investment in the current year. A consistent policy framework that can also address the weaknesses of the macroeconomic environment in the country is a prerequisite to attract good investments and sustain investor confidence. The session reviewed the current macroeconomic position in Sri Lanka and deliberated the policy framework that is desired for future economic progress.

Panel discussion

Q: The Sri Lanka domestic economy is too small to support a growth of eight per cent and so we need to rely more heavily on exports. Can you express your views on this?

Mathai: Export performance has not been strong in Sri Lanka since the late 1990s. Sri Lanka’s share of total world exports has gone down. To regain that ground is a critical thing. There needs to be global rebalancing as there are now new engines of global growth. While this does not apply to all countries in Asia, Sri Lanka has seen its export share declining and needs to boost that.

This must be done firstly through regional diversification. Right now, 60 per cent of the country’s exports go to the US and Europe which are not growing and less than 10 per cent go to China and India which are growing rapidly. It will be a challenge to tap into these new markets, more so for the private sector and it therefore falls on the private sector to build this up as your domestic sector is quite small.

Coomaraswamy: There are massive challenges that we need to tackle to achieve the goals set out for us. In yesterday’s presentation, there was mention of the significant reduction in the tradables in the economy. There has been a big shift to non-tradables and within that, the share of public administration has grown the fastest. We have shifted resources from more productive sectors to less productive sectors. The challenge lies in how we will get these resources back into the productive sectors.

Moving on to economic geographies, the most dynamic sector in the intra dynamic trading systems which are essentially supply chains. However, we are not part of the Asian supply chain. There are opportunities all over Asia and there is a big opportunity in terms of a fast growing market nearby – South India. How does one tap into these opportunities? That really is the challenge. If one gets the policies right, there are many sectors in which Sri Lanka can have a comparative advantage in terms of exports.\

Q: How do we encourage private sector investment in the country? Are there gaps for improvement?

Kelegama: Basically, the two points that were highlighted at the inauguration were consistency and predictability of policies and this is very important for private sector investment in the country. This is essential not only for domestic investment but also for FDIs. With the industries listed out by the Minister such as sugar, cement, steel and pharmaceuticals, I don’t think there is any dispute about developing those industries.

It will save foreign exchange and can later be converted into small export sectors while supporting the domestic economy as given the small size of the Sri Lankan economy, here needs to be a switch to reaping economies of scale. Many import substitution industries failed because they couldn’t make this conversion. We need an offensive strategy to encourage investment, both domestic and foreign, and promote competitiveness and productivity growth and get the framework in place so that the demand and supply elements of the economy function properly.

Theagarajah: I think the policy makers made a good attempt to stimulate investment but unfortunately the whole thing went back to the previous situation over the next 18 months after the said stimulation which naturally makes medium to long term investment difficult. The role of the SMEs is a very important ingredient in economic prosperity.

While many incentives and policy measures have been articulated, the banking sector is expected to drive the credit growth supports in the short term and I wonder if the current industry is too fragmented to play that role and if there is a need to facilitate some sort of consolidation so that you can bring in a smaller number of larger institutions.

Q: What are the pros and cons of the tax reforms that have been made?

Hofbauer: The reforms that have been taking place have been instrumental for us and because of the encouragement we have got, we have invested over three billion dollars. What we give back to the rural economy has more than doubled and so I feel that what has been initiated by the Government was a good move. Coming back to FDIs, what is important is to have a one stop shop, from a service point of view to attract foreign investment.  

Q: The Government has taken bold and commendable steps but some see that these positives are being weighed down by some policy decisions that seem to be ad hoc and in some instances, the Government has needed to reverse some of these decisions. What are your thoughts on this?

Mathai: There is one idea which talks about predictability in the levels of exchange and interest rates and then predictability in policies which is more important I think. Any businessman would like to have a guaranteed interest and exchange rate but most businessmen say that it is easy to construct models based on the fundamentals of the country.

What is not so easy to model are the decisions made about these rates. While you may have predictability in a rate for a while, if the rate then becomes heavily unpredictable, it does not good. Sri Lanka has gone through some major policy adjustments and I am encouraged by the fact that the Government has said that there needs to be policy flexibility and respond to how the economy is performing. That sort of flexibility will be a key ingredient for success.

Q: Considering our current state of FDI inflows, don’t you think we need to revamp our international relations?

Coomaraswamy: Let me first make a quick comment on the previous question.  Sadly, it is very difficult to separate economics and politics and I think that at the end of the war, authorities were pressurised to deliver a peace dividend and in the process, there was some overheating and this had to be reversed.

 They have now to be monitored in order to get the results that we require. So you twiddle the interest and exchange rates to get the results you need but in my view there is a need to introduce a new wave of reforms. A package of reforms will improve the efficiency of the economy and it will have a big impact on confidence on both domestic and international markets.

Coming back to this question, investors are not that bothered by international relations, they just want to know if their investment is safe and if they will get a good return. You have seen investment going into countries with a range of political ideologies. If we get our house in order in terms of the investment climate, we should see FDIs come in. I’m not saying we should have bad relations – we should have good relations with everybody but in terms of FDIs, what is required is for us to get our house in order.

Q: What are our strategies for addressing the deficit and does the Government consider this relevant to the private sector?

Jayasundera: As far as the Government is concerned, it is trying to generate a revenue surplus and that is what has been articulated in the terms set out and we have been making reasonably good progress on savings. We hope that the policies will augment savings in the private sector. Large corporations should be rewired to get their pricing policy right which means adjustments need to be made in the private sector without disruptions in the economy. We think if we can get large state enterprises in place, these issues can be addressed.

Q: The loss of State-Owned Enterprises is two per cent of GDP. Do you think that if this issue can be addressed, the deficit could be reduced?

Mathai: There are a lot of issues but in terms of the high cost of generation, the Government has plans for adding cheaper capacity. Beyond that I could imagine that the state enterprises can improve their performances. In other countries they allow some private legislation and what some countries have done along these lines is to put minority stakes on the stock exchange. Another advantage of something like that is that it will help develop the stock market. Lots of steps have been taken but maybe more can be done.

Jayasundera: The mirror image of the two per cent loss in enterprises is the surplus you are enjoying. The country has postponed power generation plans for two decades and as a result, the power that the country is enjoying is very costly. If the country can deal with the global energy crisis and if the private sector could adjust to that pricing, I’m sure there will be a surplus in the public sector and a deficit in the private sector. The State is providing the private sector with cushioning by taking on that loss. The conflict has had a huge price as we neglected many areas as a result of it.

Q: The Treasury has reported higher degree of bank borrowings – critics say borrowings merely postpone the problem. How do you respond to that?

Jayasundera: Borrowing is not going to solve any of these problems but this particular bank borrowing issue is a reflection of the interest rate distortions because of the postponement of the adjustment has resulted in the banking system discounting its treasury bills.

From an investment point of view, you need a decent rate of interest but from a saving point of view, no one is going to make any savings at that level of interest rates. We are trying to reverse the process by going through another round of macroeconomic adjustments.

Q: What can you say about the fact that the private sector is struggling with very old labour laws?

Jayasundera: There are certain controversial labour regulations that haven’t taken place and may not take place so the private sector needs to find a way out. What are the reforms that we can undertake in this country? These are political choices. Some of these labour regulations will not be touched upon. We need to address the productivity aspects of the labour force and move in that direction and I strongly feel that the country should engage in the future rather than dwelling in the past.

Q: When we look at the trade deficit it was caused by the costs of petroleum and vehicle imports. In this context, what measures are being taken to improve the public transport system?

Jayasundera: This is a medium to long term challenge. It’s not the first time oil prices have raised and it will not be the last time. We have still not been able to develop an alternative energy policy, energy efficient technology and service activity in the country and the medium to long term energy cost in the world has not been recognised yet.

The Government has reviewed the statistics which show that almost 60 per cent of the fuel costs are unrelated to transportation. We need to move on to non-fuel based activities and renewable energies and that investment should be undertaken by both the public and private sector. The improvement of the public transport system is a matter of infrastructure and these adjustments will be addressed over the next five to 10 years – it is a common metropolitan challenge.

Pix by Upul Abayasekara