Rebalancing Sri Lanka’s economy

Wednesday, 10 July 2013 00:18 -     - {{hitsCtrl.values.hits}}

  •  Ceylon Chamber of Commerce’s 14th  Sri Lanka Economic Summit kicks off
By Cassandra Mascarenhas With the aim of reviewing the rebalancing of the Sri Lankan economy, the 14th Sri Lanka Economic Summit, which kicked off yesterday, outlined the critical areas that require the attention of policymakers in order to sustain a 7% to 8% rate of growth of the economy. The flagship event of the Ceylon Chamber of Commerce, it will once again bring together the best of corporate Sri Lanka and world-renowned academics, Government officials and stakeholders onto one platform to discuss timely issues related to the economy and to draw a road map for the future over the next two days. Dealing with an ‘overheating’ economy Delivering the welcome address, CCC Chairman Suresh Shah explained that while the theme ‘Rebalancing the economy’ would suggest that the Sri Lankan economy is off balance, this is not the case. “However, we are some ways away from the targets that we – as a country – have committed to and to bridge the gaps, we must commit ourselves to serious reform,” he stressed. The most prominent amongst the targets is the rate of growth. The Government’s development plans speak of an 8% to 8.5% rate of growth in the short to medium term. In 2010, the country achieved the 8% rate of growth and surpassed it in 2011 but in 2012, growth slowed. “Economists called it ‘overheating’ but does this mean that we must stop an economy on the move? Can we not sustain the pace? In a sense, this is the most pressing economic question we face.” He stressed on the need to first become an export-centric nation. Shah stated: “We are too small a country to sustain growth by trading amongst ourselves. More importantly, we are an import dependent country; the stronger our growth, the greater the demand for imports, be it for consumption or production. Further, Government revenue is strongly linked to imports. Therefore, we cannot afford to curtail imports but we will be forced to – as we were in 2012 – if our balance of payments gets out of sync.” Building a strong, sustainable, export centric economy will keep our trade balances and hence, balance of payments, under control. Diversifying our basket of exports into value added goods and services and broadening our export markets – particularly into Asia – must form a central part of the strategy, he said. Secondly, Sri Lanka needs FDI. Investments must reach approximately 35% of GDP, for growth to reach 8% or higher. As of now, there is a shortfall of approximately 5% of GDP which must be sourced from overseas. In terms of global FDI flows this is not a large sum but certainly a quantum leap by Sri Lankan standards. “Challenges faced include the size of our market and the less than complimentary press we receive in investor countries. The former can be addressed via bi-lateral and where possible, multi-lateral trade agreements. In this context, we urge the Sri Lankan Government to fast track the Comprehensive Economic Partnership Agreement with India, subject of course, to the details to be negotiated,” Shah said. “Under the circumstances, we must leverage our foreign policy as a strategic tool in our development process.” Thirdly, the country must manage its expenditure. Being an emerging economy, Sri Lanka must increase investments in essentials such as education, health and infrastructure. “However, swift increases in revenue are hard to come by and in the short term, prioritising expenditure may deliver the best results. In this context, the productivity of state owned enterprises must be considered. At best, they must be privatised. A realistic solution probably lies somewhere in-between – possibly in listing commercially oriented SOEs with the Government retaining majority control.” As we move forward towards our economic goals, we must be conscious of the composition of our debt, he cautioned. He concluded: “The economic opportunities and challenges we face are well known. Yet, we somehow seem to come up short, the progress not as smooth as we would wish. I believe this is because the many stakeholders of Sri Lanka don’t play together as one team which is counter-productive. If, however, we all work together as partners, our dream of a prosperous nation will be a reality.” Sri Lanka in the 21st century The keynote address was delivered by International Monetary Fund Bank Director – Asia and Pacific Department Anoop Singh who spoke about Asia in the 21st century and what promise this holds for Sri Lanka. Asia is currently growing at close to double of the global growth rate of 3%, with emerging Asia, including Sri Lanka, growing close to 8% and if it wasn’t for Asia, especially emerging Asia, global growth would be even lower than 3%, Singh observed. Asia’s share in the global economy has clearly been rising, with its share of world GDP, trade and finance increasing over the last 12 years. Singh revealed that this would improve even further over the next 10 years, with Asia holding half the share of global GDP and trade. He added that trade integration within the region will also speed up within the same period of time. He then outlined how Sri Lanka could grow at 8% or higher over the next 10 to 15 years as envisioned by the Government, Central Bank and other institutions. “Productivity improvements have probably been the driver of sustained growth in growing countries in Asia. Macro stability is critical. If you don’t have this along with financial stability, you’re probably not going to be able to grow at 7 or 8% for 25 years,” he stated. Sri Lanka has made progress with macro stability, improving greatly over the last three years with inflation coming down as well. Comparing Sri Lanka’s export sector, current account and reserves with those of other ASEAN countries, while the country has done well in growth and brought inflation down, the current account remains in deficit which makes Sri Lanka weaker and while reserves have improved, they are also weaker than other countries in ASEAN. Sri Lanka also still has a fiscal deficit and in this regard, reforms have been undertaken in recent years and it will take some time to raise revenue, Singh noted. Revenue in Sri Lanka is still below where the ASEAN countries’ revenues are. The Government debt has become to come down as well, which is important. Financial stability is relatively good and Tier One capital for financial institutions in Sri Lanka have stayed relatively high although it is still less than the ASEAN countries. “In good news, non-performing loans have come down and therefore, on macro stability, from other experiences, inflation has to be stabilised at a low level and we need to have fiscal consolidation in a way that increases spending where there needs to be spending and the external sector needs to be strengthened further. Over the next 10 years financial deepening and financial integration is going to be very important for Asia and that is why financial stability is very important.” Singh noted that history tells us that trade openness is critical for jobs, productivity and growth. Sri Lanka’s export ratio has fallen which is an issue because when countries grew at more than 7% for 25 years, it was very difficult to maintain high growth if you are not open in trade. “If you look at the structure of exports in South Asia, including Sri Lanka, you see that the bulk of exports the destination are the advanced economies, US and Europe, not Asia. Trade with East Asia is particularly small. It comes back to service exports and commodity exports.” Sri Lanka’s share of service exports has improved but there needs to be far more emphasis on the modern section of services, he stated. Looking at the export of commodities, high tech manufacturing in the country is still very small and this needs to increase if integration with East Asia is a major objective. “While Sri Lanka has brought down its average tariff which helps trade integration, non-tariff barriers have actually increased which is an issue faced by many countries. To have sustained productivity, trade and growth without being integrated externally is very difficult.” He added that FDIs into Sri Lanka is still very low in comparison to other countries and stressed on the need of increasing FDIs to boost productivity. The country, he observed, also needs to increase its spending on research and development which is still very low. Target of 8% is plausible Investment is key to sustain growth and Sri Lanka does quite well, with Singh stating that he was impressed with the emphasis the Government is giving now to build infrastructure investment in Sri Lanka. However, in terms of public investment, Sri Lanka is still below the average of other countries that have grown very rapidly. In many countries, military spending absorbs a lot of spending that can be used on resources, which is a factor. Singh also pointed out that Sri Lanka’s public savings need to rise and that it is an issue linked to State-owned enterprises, with the losses of certain enterprises, for instance, the CEB and CPC, absorbing Government savings. “Like other countries in East Asia, the demographics are changing. The dependency ratio in Sri Lanka is probably going to fall, there will be more elder people and this will make it more difficult to get savings. This is why focus on factors that increase savings will be very important.” While Sri Lanka’s financial sector is doing well, like other countries in South Asia, there needs to be more generation of long term loans. “There is a need build up a corporate bond market to deepen the equity market and institutions are not lending in the longer term which is needed to build up investment.” “Labour participation – can it be increased? It helps if you have more people working. Sri Lanka does rather well but to get participation up there needs to be participation by women in the labour force which is relatively low and this is the case in other Asian countries as well, including Japan,” Singh added. Singh then stressed on importance of the quality of labour which depends on education and development. Research shows that higher education spending helps productivity and compared to a range of other countries, Sri Lanka’s spending on education is still relatively low as is spending on health. “To get growth up, if you can raise the quality of education and health, you would more or less almost be there.” He noted: “It is so important to have a strong business environment and the record in Sri Lanka is reasonably good, although the country’s ease of doing business indicators is not as good as some of the ASEAN countries. Sri Lanka poverty has actually come down a lot. In Sri Lanka, as growth has increased, poverty has come down faster than in some other countries. Furthermore, as you become more equal, growth tends to improve. In order to grow faster, you have to become a more equal society.”  “The three main contributors to growth are productivity, capital and labour force and Sri Lanka must look to improve these ratios, which is possible. Productivity has been in the range of 2 to 3 over the past 12 years and if that can rise to 3.5, and if contribution can rise to 2 or 3 and that of labour stay almost where it is, the target of 8% is plausible and therefore, we should be optimistic.” SL must look at India and China The Chief Guest at the inauguration of the 14th Economic Summit, Senior Minister of International Monetary Co-operation and Deputy Minister of Finance Dr. Sarath Amunugama stressed on the need for expansion of exports and the improvement of skills, productivity and education. “The Opposition never sees any good in what is happening. We are familiar with the good elements – we have successfully concluded the war, are now a breakout nation and we have new opportunities and choices to stimulate growth of the economy. The integration of the north and east has had great implications on the economy, particularly in the agriculture sector.” He noted that the country is poised to go to a higher level early as the investments in infrastructure, education, IT, science and technology are beginning to just pay off. “We are looking at these statistics in a transitional stage. Five years from now, particularly in areas of infrastructure and education, there a completely different picture will emerge.” “This is a time when we can confidently project into the future. If we have done well up to now, we have also laid the groundwork for a spurt if all the other variables are right. There are different factors that have to be put together. In reality, you have to bring in all dimensions – social, economic, political and international – and it is when all these come together that can you think of how a country can move forward,” he observed. Amunugama added that Sri Lanka has had very commendable growth and that the dip to 6.5% was one experienced by India, China and Vietnam as well as it resulted from a combination of local and external factors. “The global economy is being driven by Asian emerging economies. The US economy is just beginning to reassert itself and Europe is a basket case and all these should be factored in when deciding how we are going to manoeuvre about in this situation,” he stated. He stressed on the fact that Sri Lanka is one of the few countries in the world with FTAs with India, China and Pakistan, noting that is the country plays its cards right with China and India, it could get the figures it is aiming for. “We must look at a shift from advanced economies to China and India.” He added: “What is wrong with China buying everything we produce? These are different approaches we can consider. When we had the dip in garments, we faced lots of criticism but we would not have been eligible for GSP anyway because we moved to middle income country status. We still have other options.” While discussing the expansion of exports, Amunugama questioned if it could be done so in the current environment, with even the Chinese and Indians worried about the export situation. While building up domestic market is feasible for India and China, this is not the case for Sri Lanka and options must be chosen depending on our own background, facilities and skills. “There is a lead role for the Sri Lankan private sector to play in terms of the improving skills and productivity capacity and initiatives undertaken. We also need a transition in education – what’s the point of giving 6% of GDP to education if we are teaching garbage? That’s a stupid policy. We first need the right type of curriculum and education and an internal transformation that is more growth oriented,” he explained. He emphasised that the Government and Finance Ministry have a very friendly approach to the private sector, as seen in the Budget where every single cluster is consulted. “Maybe we can make it even better and I assure you that your contribution is greatly appreciated and if you have done well in the past, we expect more of you in the future.” He added: “The good thing is that we are keeping money in the hands of the private sector with our very low tax regime and maybe instead of buying Lamborghinis, you should invest the money in the growth of Sri Lanka and be more active, and we in turn could perhaps have more policy consistency to assist you from our side.” Pix by Upul Abayasekara