Ravi K sets the record straight

Sri Lanka has recently been witness to entirely novel developments in its political climate, with a minority Government meeting fierce resistance from a majority Opposition on a range of issues. The debate has now spilled over into the realm of economics. The Daily FT sat down with Finance Minister Ravi Karunanayake to discuss the country’s current economic health relative to its performance over the last decade, recent scandals related to the Central Bank and Customs, the impact of combating corruption and its future economic outlook. Following are excerpts:

Finance Minister Ravi Karunanayake - Pic by Upul Abayasekera

By Channa Fernandopulle

Q: There has been a lot of vocal criticism from Opposition circles about the state of our economy. To start off, I’d like you to set the record straight on Sri Lanka’s economic situation, where do we stand in terms of key macro-economic indicators like public debt? Where do you expect those indicators to move in the coming months?

A: Firstly I’d like to thank you for this opportunity to clarify certain issues. I would like to start by putting our current position into context based on what we inherited and where we are now. The general impression on 8 January was that the economy was booming, and that the country was enjoying an unprecedented period of prosperity, this that and the other. But the real situation as you must know by now is quite the contrary, in actual fact the economy was in an extremely precarious position.

On 1 January 2015 we basically had a situation where the country was burdened by total foreign and local debt of Rs. 1.78 trillion. Today total public debt is roughly in the range of Rs. 8.71 trillion with 8.3 trillion directly as public debt and a further contingent liability of Rs. 600 billion by way of bonds which actually brings us closer to Rs. 9 trillion in total.

Now you might wonder how on earth public debt ballooned from Rs. 1.78 trillion to almost Rs. 9 trillion within a span of 10 years and the simple answer would be that it was down to how the Rajapaksa Government managed our economy.

In terms of our reserves, when we took over they were roughly in the range of $ 7.1 billion and as of this moment it is in the range of $ 8.2 billion which we expect to bolster with another $ 600 million through high profile companies like Barclays, Credit Suisse and others on rates of between 3.25-3.75% so we expect reserves to move to about $ 9 billion in the future.

So that was the background to our current position. Now when we look at all the problems that the Opposition is trying to speak about; allegations that we have no money at all; this is an absolute fallacy that has been created at the hands of people like Nimal Siripala de Silva, Susil Premajayanth, G.L. Peiris, Dinesh Gunawardena and Wimal Weerawansa. These people who do not know a tuppence about economics are basically trying to project this idea that Sri Lanka has no future and that there is no money but the actual position as I have just shown you, is quite the contrary.

Today the Maithripala Sirisena-Ranil Wickremesinghe Government that got elected on 8 January already commands enormous respect and credentials overseas. When we go to the IMF, World Bank or Asian Development Bank, they all express a great amount of confidence in this combination. As you know the ADB is working to bring their annual conference to Sri Lanka in 2018, this is a mark of the confidence that this Government commands on the international stage. Where the ADB was giving $ 400 million, it has increased that by four times now and of course, this makes my life as Finance Minister much easier.

The former Government would like to think that we are in a financial jam because they knew very well that they were in such a jam when they handed this economy over but they aren’t capable of understanding the kind of fiscal discipline that we brought in through the Interim Budget. We gave our promises but never increased a single cent in taxes. Their traditional course of action was to increase taxes on one side and give the benefit of those increased revenues on the other side.

This time we gave all these benefits but we cut off the waste and the extravagance of the previous regime; what was only going into the pockets of a handful of individuals was removed and we brought those funds to the people. That is the reality. That is why it saddens me that people with repute get carried away with absolute rubbish that is uttered by people who heaped ruin on this country for 12 years.

 Q: Is the Government on track to meet its revenue targets? What is your response to allegations that this Government has been guilty of the same kind of political interference that it has been campaigning against?

A: Since the Interim Budget, we have been working to bring in innovative measures to increase revenues, measures like the Mansion Tax and taxes on casinos and taverns; none of these could possibly have an impact on day-to-day life but still Mahinda Rajapaksa’s cronies are working to block those efforts. They don’t want casinos to be taxed, they don’t want the cost of operating taverns to increase, they don’t want the Mansion Tax to come in, and they don’t want farmers to be given a lower duty on tractors because they don’t want the economy to go forward. Is that not sadistic?

When we tried to ensure that we bring in some revenue into the Treasury, those people with their ulterior motives looked to question why this revenue was being brought in, for what purpose it was being brought in. These are people who basically work to ensure that these revenues which are due to the State do not come in.

Look at the sources that bring the majority of revenue to the country. The Excise Commission had recorded revenue of Rs. 3.1 billion in 2014 November, but in April it came up to Rs. 9.8 billion. How did it increase threefold? It was because people were given the freedom to carry out their work without any political interference. It’s the same with Inland Revenue and the Customs Department, where they recorded Rs. 2.2 billion over the approximate Rs. 1.1 billion that they had recorded under the previous Government. So the question we need to ask is, where was that money really going?

This was money that was legally yours and mine, the people’s, and it was going to undesirable people and now those same people are the ones who are trying to turn around and fight against us and say ‘the minister is involved with this or that’.

I challenge anybody to show us a single instance in any area where there has been any interference. The President doesn’t interfere, the Prime Minister doesn’t interfere and this Finance Minister doesn’t interfere. So this is an open challenge to absolutely anybody. Instead of acting like absolute weaklings who don’t have the spine to back up their accusations, show us where these misdeeds went on.

With the Customs Department, they are trying to create an impression that something suspicious happened to make the Customs Director General resign but Wijeweera said nothing about being coaxed and all we have is people like Susil Premajayantha, Mahinda Yapa Abeywardena and Thilanga Sumathipala saying otherwise; maybe this is based on the bad intentions that they have in their own mind because the DG was very clear that his resignation was for personal reasons.

I don’t want to talk too much about some of the things that the previous regime did with the Customs Department but just to show once example, sometime in late 2013 there was a number of Lamborghinis brought into the country for which no duty was paid. When we tried to ask questions about this, those people responsible tried to stealthily get those cars exported in order to avoid duty on them.

However our import controller was tough on them and asked them all the necessary questions and imposed a bank guarantee of Rs. 279 million. Some try to say that this is vindictive but for one-and-a-half years, there was no duty paid on those cars and when they thought that they would have to pay duty, they tried to dodge it by getting rid of the cars.

It’s the same with this areca nut issue, these were businesses that were supposed to generate value for the country but ultimately those people carried on their businesses without giving a single cent to the country.

 Q: That being said, it’s hard to deny that the Customs Department has been notorious for its corruption, particularly among low-mid level employees. There have been many reported instances of officials asking for outright bribes in order to clear cargo to the extent that it has even interfered with the 24/7 operations recently implemented. In that context, are there any steps being taken to investigate operations at the Customs Department?

A: I appreciate how frankly you asked that question. I would say that 98% of Customs officers are genuine and honest and some of them who mess around have tarnished the good work that this 98% carries out. I am happy that these good people are helping to bring revenue to the country because the poor innocent people of this country have been taxed enough.

If you really collect what is due legally to the country, you can basically have that much more comfort for the people. But as you quite rightly pointed out, they are trying to distort this. The 24/7 operations was implemented to reduce congestion, increase, opportunities and efficiency and reduce costs but there are other people working against it.

In that sense what you said is absolutely correct but I’m sure that the majority of officers at the Inland Revenue, Excise, Customs and Import Control are working hard to support this Government. The banks are getting involved because they realise that we are pursuing genuine objectives and I think there is now an understanding that we say what we mean and mean what we say.

I also appreciate that you are asking these questions because you don’t need to have a Right to Information Act in order to ask questions. You can reach out to us and ask us for information at any time because it is public information. We are holding office for and on behalf of the people, we have a clean President, a clean Prime Minister and Finance Ministry and a Cabinet that is genuinely committed to securing clean governance.

 Q: It is also true that the Opposition seems intent on portraying your Government as being anything but clean. They point to the Central Bank Governor and the Treasury Bond issue as examples and of course you’ve already discussed the Customs Department issues. But leaving aside what the Opposition feels, all of these allegations and counter-allegations and the increasing frequency of no confidence motions against yourself and the Prime Minister must be very unsettling for our private sector. In that context, what would your message be to the private sector in the backdrop of all this political obstructionism and uncertainty?

A: That is a discerning question that you are asking. There is no country that has in 120 days had 20 world leaders met either in Sri Lanka or overseas by our President and Prime Minister. The Opposition is dumb-struck by this fact because they were unable to secure the level of international cooperation that we have been able to.

Now they are trying to tarnish this image as much as they can by tabling no-confidence motions against the Government, the Prime Minister and Finance Minister at the drop of a hat. That is the only reason they are doing this, to promote as much instability as possible and despite their best efforts we were still able to collect $ 1 billion – $ 388 million in development bonds and $ 638 million in international bonds – in just one day. They tried to go around the world and slam this Government but internationally we are able to command much more confidence than they ever could.

They thought that if you couldn’t get $ 488 million in Treasury Bills, you wouldn’t be able to pay the salaries of Government servants. We paid that. We waited for 1.5 months and paid it and they are desperate now only because they are Mahinda Rajapaksa’s cronies.

The den of thieves that they created resulted in a huge hole being created in this country’s public finances. They basically handed over an empty Treasury to us and we still went forward without a problem and they were dumbstruck. The world understands that we have been bringing debt servicing down. Where they had revenue of Rs. 1,535 billion, their debt serving was Rs. 1,300 billion; how on earth can you run a country on this basis where 90% of your country’s revenue goes towards debt servicing?

 Q: Is it true that the majority of our public debt is held by China or is that an overly simplistic view of the current situation?

A: I would say it is more complicated than that. There are groups that are looking to unnecessarily create anti-Indian, anti-Chinese or anti-Western sentiments as the situation suits them but this is all rubbish. There are no such biases for us. We treat everyone as our good friends and partners but we may have opinions that a different from some countries based on different issues. But that is not an excuse to isolate ourselves.

We have to get things moving and there is no need for anyone to bully us; nor do we bend to anyone else. We are a sovereign nation that will look to our own interests. But in our hour of need, after having been run down by 12 years of absolutely whimsical, dictatorial politics that was carried on by one small group of people, we have inherited a difficult economy and all we are trying to do is correct the anomalies they created and then take this country forward. For that purpose we want our friends to help us go forward.

We also see for the first time that a minority Government is beating out the majority Opposition because the President got elected by a fresh mandate of the people and these people with ulterior motives know that they cannot contradict that mandate. I found it hilarious therefore when Mahinda Rajapaksa said that the 100 days are over and the next 100 days belong to him and his supporters. Those people had 12 whole years to run the economy down and he now has the audacity to make such cheeky comments. When we look at what he has already done in the last 12 years, that alone should be sufficient.

Q: The probe that the UNP launched into the Treasury bond issue found the Central Bank Governor to be innocent of any wrongdoing but at the same time they found that there were irregularities with the involvement of Perpetual Treasuries. Assuming then that the Central Bank Governor is innocent as per the findings of the probe, was there someone else in the Central Bank responsible for these irregularities or was it a systemic issue; something wrong with the procedures that caused this and what is being done to rectify this problem?

A: Well, if I may give you the other side of this story – and I’m not trying to say that two wrongs make a right – but if this has been such a dramatic and serious issue, I would only ask about what was done with those private placements carried out by the former Governor Nivard Cabraal behind closed doors? What we did was actually a process that was open to the public. 

Instead of talking about why $ 1 billion was taken, what about the $ 10 billion that these guys have taken? And then to allege that the impact to the country for a $ 1 billion bond is $ 50 billion – I mean someone has to be mentally unsound to make such statements.

Now when I defend the Governor I’m questioned as to why I’m doing it but I am the Finance Minister and with collective responsibility and the Prime Minister being the line minister, it’s not fair to say that someone else should handle this issue. I believe in being a team player and it is a collective responsibility.

Now am I idiotic to say something wrong and then walk in and say that pretend that everything is alright? No, I believe that if there is something wrong, I will be the first one to say so but at the same time what is right is right and if there is some evidence to show that someone has been involved in wrongful trading I will be the first to say that we should impose fines and take action. So we are waiting for evidence to go on.

Remember that they had 12 years and in that time not a single issue was cleared. Pyramid scams were there the day that Cabraal and Rajapaksa took over and they did nothing for 11 years. They had private placements and no one looked into them, no one said anything. 

Look at our current inflation figures, it’s at 001%, how did that happen? It happened because we cut out the element of corruption. Our job is not to reduce corruption but to eradicate it entirely and that is a tough job. You will see that money talks but we are people who are professionally competent, forward-thinking and God-fearing, and we are able to withstand such pressures and prove that a clean Government at the top from the President to the Prime Minister will result in clean governance filtering down to the rest of our institutions.

 Q: Given your allegations against the former Governor, will there be any investigations into former Governor Ajith Nivard Cabraal’s tenure at the Central Bank?

A: Definitely, most definitely. He’s a person who accused me of bringing money in from Raj Rajaratnam and for 10 years he persecuted me and when the High Court finally asked what his complaint was about, and looked to see if there was any reason at all for the investigation to go forward, they couldn’t produce anything. This was just political harassment coming from people like Nivard Cabraal who hid everything under the carpet and now pretends to be an innocent lamb when they are the ones who have ruined our economy.

Wimal Weerawansa is correct in one statement only. He said that there were economic hitmen. Yes certainly. Nivard Cabraal was definitely one of those hitmen. Not only did he hit the Central Bank but all around the fence as well. 

Contd. on p12

Q: MP Susil Premajayantha recently made comments alleging that per capita debt in Sri Lanka is becoming an issue and alleged that your Government is placing an unnecessary debt burden on the people of this country. Is there anything that you would say in response to such allegations? 

A: My God, he has finally got up out of his sleep after 12 years. He was a Minister under Mahinda Rajapaksa; I’ve already discussed how they increased the debt from to Rs. 9 trillion and now they are asking that from us? In 120 days we have worked hard to correct the wrongs that they were responsible for, so he either must have selective amnesia or he basically doesn’t know what he’s talking about.

Q: But just to clarify, did public debt rise after you took over?

A: We have very clearly shown that we have not brought in any new debt but we have only been clearing their past sins. Public capital expenditure in 2015 stood at Rs. 596 billion. The previous regime had Rs. 495 billion of roads only. Of that, almost 25% had Cabinet approval, the others were a total voyage of discovery and went ahead without any such approvals.

Now that we have inherited this economy, we are forced to ask these questions; where were the approvals? When there is no approval we have to stop the project and then there is a halt in construction. So all of those areas had to be re-examined and in many cases examined for the first time, and then those contracts had to be re-negotiated. 

In many instances the cost of several contracts was brought down drastically, by as much as 20% in some cases. How was that possible? By cutting out the corruption. But these people are trying to distort the truth.

Our current debt position is simply because of what the Rajapaksas are responsible for and I will give that information to anyone who wants to see it. As capital expenditure we have reduced cost and given the benefit of that to the people. Investments must also continue, but that must be on low-rated costs, not on extravagant high-cost ones.

Q: And your outlook for the country and the economy going forward?

A: Today people love to come to Sri Lanka to invest, because it is a country on the move. People feel that there is new opportunity; there are no ridiculous start-up costs. In the past 20-25% of costs comprised of start-up costs so they would question how they could start a Rs. 10 billion investment when you have to give Rs. 3-4 billion to unknown people. That was the situation under the previous Government but today you get people from all over the world looking to come to Sri Lanka and start up a business. Banks are interested, and you have people willing to lend, hotels are coming in and the construction industry is booming.

A mere 120 days is not enough to reverse the negative effects of 12 years of mayhem but I feel the most corroborative evidence that we are succeeding in this respect is the smiles on the faces of the people. Their fear has been extinguished, the cost of living has reduced, you’d see almost Rs. 760 billion in the coffers because you had Government servants getting Rs. 10,000, Samurdhi getting 200%, Mahapola students getting Rs. 5,000, savings for each family owing to the reduction was about Rs. 7,500 a month in cost of living.

That reduction has to be multiplied by 12 months across 5.2 million families in order to understand its impact. All together you have about Rs. 760-800 billion brought in as new revenue into the economic system so that has to spark off demand. This in turn helps the supply side which means more opportunities for manufacture, which means jobs, that’s the way forward.