Budget 2011 to improve macro-economic fundamentals – CB chief

By Cheranka Mendis

In the forward march for Sri Lanka’s economy to prosper, getting the proper macroeconomic fundamentals right is the first thing to do. And with the budget proposals announced by President Mahinda Rajapaksa four days ago, getting there is going to be no impossible task, Governor of Central Bank Ajith Nivard Cabraal said.

Central Bank Governor Nivard Cabraal addresses the post-Budget 2011 seminar organised by BDO Partners Sri Lanka with latter’s Managing Partner Sujeewa Rajapakse alongside. On right some of the participants. Pic by Kithsiri de Mel

The budget which has been based on the Mahinda Chintanaya 2005 aims at a society with inclusive growth, empowering local entrepreneurs to move from SME to larger institutions — larger institutions to become international players. The stage for that has been set and is augmented by the policy decisions that have been taken via the newly announced budget.

Cabraal asserted that a for the first time in history so many projects have been implemented simultaneously which would help Sri Lanka to emerge as a country that has abandoned the image of war footing. “Approximately USD 1.5 billion has been used for the completion of the Mahaweli scheme. But for all the ongoing projects at the moment the cost is only USD six trillion. Still there have been no reductions in any of the support schemes such as Samurdhi or the fertiliser support scheme,” Cabral said. He was speaking at a Budget Proposal 2011 seminar organised by the BDO partners.

 “The government is keen on supporting macro economic variables to perform in a manner for development to take place. That includes GDP ration, inflation, unemployment, infrastructure and poverty based on a sound economic framework.” Sri Lanka can now boast about sustainable development with an eight per cent growth within the next five to 10 years; and for that a long term budget needs to be formulated.

The budget shows bold moves on the part of government with large cuts of about 35 to 40 per cent instead of the usual one per cent cuts and increments. The moves will energise the people, creating enthusiasm and awareness than what could be achieved by smaller cuts. The private sector now needs to start getting activated to take the development of the economy forward. “We built it up. Take the confidence and take it forward now. Be strong,” the Governor said, continuing, “from lower tax rates, relaxed exchange controls and saving schemes implemented — such as the new pension scheme — which will draw in four to five million people to the savings net, leading the country towards fiscal upliftment.”

On doubling per capita income, he stated that while it took 56 years for the country to reach a per capita income of USD 1000, within the past five years (2005-2010) the income level has been doubled. However within the next five years the per capita income is expected to reach USD 4000. “It is an extraordinary move and it won’t be easy but that doesn’t mean we cannot achieve it.”

He also said that if all goes according to plan the current total lending of Rs. 1.7 trillion will increase to Rs. 4000 trillion within the next five years. Capital must be formed, harnessed and lent in order for that to take place. The number of bank transactions will also rise to three times the present number to go alongside the increasing lending portfolio and the banks must now look at payment system updating, aimed at the expected time period On infrastructure development, Cabral said that while the country took 600 years to realise the need of a new port apart from the Colombo port, as at now five others are being built simultaneously. He warned that such projects are not built with the vision of next five years and that even though the return on investment cannot be achieved during that time, such projects would propel long haul benefits for the next 100 years or so.  “While the government has to support the structure, you, the private sector must think of your own companies. That will be key; we will look at private sector organisations for the future.”

Poverty reduction and elevation which has also been addressed in the budget was touched upon by the Governor saying the target of providing electricity to every person for 24 hours of the day within the next two years is an assurance that the government has really thought things through. The poverty rate which was at 22.3 per cent in 2003 came down to 15. 2 per cent in 2007 and faced a sharp decline of 7 per cent during the past few months.

“To have a stable economy, the country needs to be stable,” Cabraal said drawing example from Singapore and its premier who has been on the job for 35 years. “Consistency and continuity must be ensured starting from the political backbone itself.” And for that it is important to shift policies and take bold decisions. “The budget is designed to spur growth and ensure that it happens. It also aims at making it easier for businesses to grow.” Sri Lanka which ranks at the 105th position in the ‘doing business’ index hopes to climb to 40th place soon. Cabraal admitted that as at now the country is lagging behind approvals both in the private and public sector. The government will soon be IT enabled in all activities making everything from approvals to recommendations faster.

Tremendous vistas in IT, BPO and skill development will open up and will be waiting for the private sector to grab and invest in. If the country does achieve a growth of eight to 10 per cent within the next five years, a dream will come true, a positive one and with it a whole lot of changes in the systems. “It takes a collective effort to make Sri Lanka the wonder of Asia. Do it in your own might,” he reminded.

Q&A

Below are extracts of the Q and A session with the presence of the Governor

Q: When can Sri Lanka join the big groups such as the G20?

A:  We have not put any labels to any implementation plans. President Rajapaksa in his swearing in speech stated that Sri Lanka will not be a miniature form of any other nation. We will look at our own methods and do what we think is right. We do not have specific targets such as, when Sri Lanka can join the G20. Someone might invite us later. Growth is a priority for us backed by inclusive development, and infrastructure. Like Kumar Sangakkara says we must get our basics right. The rest will then follow.

 

Q: What is the purpose of per capita income and how do you plan to reduce inflation?

A: Sri Lanka was a country with an average inflation of 12 per cent up to two years ago. No doubt the inflation rate was high.Without hyper inflation we were one of the few countries who had such high level for a long time. We have now reached an average inflation of 4.5 per cent. We should now aim at a single digit inflation rate of say four to six per cent. If so, we can reach a per capita income along with other indicators such as poverty and regional development. Until recent times the GDP contribution from the Western Province was far greater than the other provinces, such as 52 per cent. in 2009; this fell to 46 per cent due to the other provinces catching up. There is an improvement in macro economic commitment which would take to creating an overall rich community rather than the rich only getting richer.

 Q: How can the country develop with a jumbo cabinet? What about corruption?

A: Take annual reports of big 100 billion companies and see the amount of photos of directors, managers etc. in a private sector company. How many cars and mobile phones do they use? In a bank how many assistant general managers and branch managers are there? How can you function without them?

The country is expanding. It is not the same country that was there in 1948. The same model cannot be there, factors must change. CBSL had a staff of 40 then; now we have a staff of 1000. But if we did not; how can we grant permission for 300 bank branches a year? Who will handle all the audits?

The world is changing. You must be productive; yes, but you will also have to assign people for the jobs at hand. This is the reality.

How many directors are in a company? But how many of them actually work? It’s the same as that; actually it’s much better in the government. It’s the same with corruption both private sector and public sector should be accused of it. However private sector corruption hardly makes news. Both parties must curb it for proper development to take place.