Sri Lanka: Recipe for growth and stability in the next decade and beyond
Wednesday, 9 October 2013 01:02
Much has happened in Sri Lanka in the post-conflict years, such as the doubling of the per capita income to reach over US$ 2,900, gaining status as emerging market economy growing at a robust US$ 59 billion, single digit inflation, reduced poverty and unemployment levels, US$ 6 billion foreign reserves, tangible progress in regional development and the Western Province share of GDP reduced to around 43%; regular foreign investment has flowed into banks and the stock market; the banking system maintaining in a stable condition even in the midst of very difficult global circumstances among a long list of positivity. All these are the fruits of the peace dividends the country achieved when it rid itself of a brutal conflict.
CBSL Governor Ajith Nivard Cabraal noted that the collective efforts that have been made to improve and sustain the positive outlook for the nation have ensured a conducive investment atmosphere.
In this regard, the stable inflation and comparatively lower interest rate regime prevailing today serves as an important support to businesses, by reducing the risk factors, while the country’s peaceful environment, complemented by political stability, has been able to ensure the continued safety of investments, providing a reasonable yield.
The robust investment framework along the lines of the ‘5+1’ hub concept, has now opened out new ventures in promoting maritime, aviation, energy, knowledge and commercial sectors, while tourism is emerging as a further thrust industry with great promise.
The list of ‘have dones’
Many special initiatives have been taken over the past several years in order to fashion and support this transformation. Cabraal listed out the following as key driving factors of the economic transformation of the country:
Establishing consultative and advisory committees from the private sector for monetary policy and financial system stability; opening out Sri Lanka T-Bills and Bonds to foreign investors; issuing international sovereign bonds; introducing mandatory corporate governance practices for banks and NBFIs; developing resolution schemes to stabilise systemically important banks and NBFIs; establishing a Deposit Insurance and Liquidity Support Scheme; fashioning the current “virtuous cycle” – low inflation to low interest rates to higher investment to higher growth, etc.; accessing an IMF SBA on our terms, and completing the program; intervening in the application of certain fiscal policies; implementing tough monitoring of inflation control measures; introducing far-reaching stabilisation measures whenever needed; and relaxing foreign exchange regulations on a planned basis.
Ingredients for Sri Lanka’s long term growth and stability recipe
Commenting on maintaining sound macro fundamentals and continuous movement of those macro fundamentals in a positive and benign direction, Cabraal said: “The demand side management would have to be carefully anticipated and managed, while the required interventions in the supply side will also need to be promoted and encouraged.” At the same time, fiscal consolidation would need to be sustained, so that the positive effects of such effort would enable the debt dynamics to improve constantly.
“These efforts would also have to be supported by ongoing improvements in productivity, with the resulting benefits influencing the exchange rate as well. Businesses will have to become more productive, competitive and efficient, and the overall expansion of the economy through new fronts, particularly the 5+1 hub, would need to continue in a focused fashion.”
Attract regular capital from outside our shores in order to bridge current savings/investment gap and sustain over 7% growth momentum
“We believe that our savings/investment gap could be bridged through several sources in addition to the traditional sources and have encouraged foreign inflows into the banking sector, foreign inflows into the stock and corporate bond markets, and foreign inflows as loan capital into eligible businesses.”
All channels have now been made transparent and convenient, thereby making it easy for overseas investors to make their investments. These convenient inflows, with appropriate safeguards for the providers of capital would enable the country to enjoy a sustained inflow of savings, which would in turn, support the high growth momentum envisaged by the economy.
Continuously ensure the stability of the financial system
Over the next few years efforts will be made to consolidate takes banking, NBFI and insurance in order to have strong institutions within these sectors. “In today’s hostile and volatile environment, it is necessary for the banks and NBFIs to at least have a minimum critical mass, in order to be competitive, resilient and strong,” he explained. “That would necessarily mean that some of the smaller and less stronger institutions would need to merge with each other, or become the targets of strategic acquisitions in order to create large and strong institutions in this sector. Such a consolidation would also enable the governance structures to improve, as well as reduce today’s rather high ‘cost per transaction’, as a result of the enhanced scale of operations. “
Sustain poverty reduction strategies and continue strategies that are designed to foster balanced regional growth
Over the past four-and-a-half years, enormous investment has been made in the north, which has resulted in the Northern Province reaching a reasonable parity vis-à-vis the other provinces. The stage is now well set for the constant upgrade of a variety of services at Provincial level, and the effective integration of all areas of the country, with better roads, technology, communication, business services and banking services. “Such improvements would serve to reduce provincial disparities, and thereby allow the country to achieve its ambitious goal of less than 3% poverty by 2016,” he asserted.
As a result of the fast tracked development of the provinces, the country could reach a situation where GDP contribution from the advanced Western Province would only constitute around 33%, by the year 2025. Such an outcome would indicate a sustained revival of the eight lagging provinces, which collectively accounted for less than 50% of the GDP contribution in the year 2005.
“Accordingly, if within 20 years, 2005-2025, the Western Province share of the country’s GDP could be reduced from 1/2 to 1/3, I believe we would be well on track to balanced regional growth, whilst also not depriving the Western Province of the fruits of rapid development. Such a transformation would mean that the cry which led to two bloody revolutions, namely, ‘Kolombata-Kiri, Gamata-Kekiri’ would be a slogan which could then be comfortably relegated to the dust-bin of history.”
Enhance productivity levels of the country while managing migration of a large workforce from current traditional sectors to some of the new sectors that are opening out in our economy
Where would Sri Lanka get new work force to drive the economy in the future? “Some will need to migrate from the agricultural sector, while others would need to shift from their present activities to the new areas of activities,” Cabraal responded. “Such a shift would demand that the existing economic activities would have to robustly improve productivity levels through the use of better techniques and methods, including the application of IT.” This would require education and training effort on a large scale.
Continuously improve global rankings
Having started an initiative to carefully examine the criteria that is used to rank countries in relation to various indices, and taking the necessary steps to improve in each of these areas, Sri Lanka has been able to upgrade its international rankings over the past two years. “If efforts continue prove successful over the next few years Sri Lanka will materially improves its global rankings on many business indices, and standout as an economy with great promise and potential.”
Show progress of political stability on a sustained basis
There is a vital need for Sri Lanka as a country to work towards developing our external image on a continuous basis, Cabraal observed. “If we are able to respond successfully, and convey this positive reality to the outside world in a comprehensive manner, despite other factors portraying negative images we could put to rest many of the unfair and false allegations that have been levelled against the country.”
The next challenge
Cabraal reflected: “In my view, the special ingredients I noted as well as the other elements that are needed to develop a good economy such as basic common sense, good timing, sound policy mix, sensible political considerations, continuous well-being of the people would all need to be generously used as flavours in the preparation of the final dish of growth and stability.”
Sri Lanka would also need to maintain the balance of all the ingredients at the right temperature if the outcome is to be right. “After all, a dish, if it is overdone or half done, is not going to be edible. In the same way, if economic planners do not judiciously give consideration to developing and matching the right mix of policies which work, and being sensitive to the timing and sequence of the flow of the policy implementation, the growth and stability of the economy would not be attainable,” he said.
“If Sri Lanka is able to assess tomorrow’s challenges today and develop plans accordingly, the country will truly be on course to deliver growth and stability on a sustained basis to our people and our economy.”