Strong call for realistic government policy
Duminda Hulangamuwa, Deputy Vice Chairman of the chamber, speaking at the event.
A strong call to ‘live in the reality’ when making government policy came from many participants across different sectors at the recently held Ceylon Chamber of Commerce (CCC) Sri Lanka Economic Summit 2021.
Dr. Nishan De Mel, Executive Director, Verite Research speaking on ‘Setting the Foundation for Macro Growth’ pointed out that it is vital to understand the realities of the economy which is posting higher deficits, lower revenue along with higher debt.
He said Sri Lanka’s reserves have never been this low. “It is really important for the private sector and the Ceylon Chamber to invest in professional analysis in terms of the numbers relating to the above realities,” Dr. de Mel said stressing that various numbers are being presented on political platforms.
He said the goal should not be to repay the debt to foreign bond-holders who have already bought our debt at deep discounts of 20, 30, 40 per cent and are getting windfall returns each time the government pays to maximise their benefit but to minimise the pain for the Sri Lanka economy and the Sri Lankans.
Tallying policies
Government policies do not match with the revenue projections of the budget, he added noting that last year there was a 23 per cent gap between actuals and budgeted revenue. Interest cost is about 6 per cent of the GDP and 71 per cent of total revenue. Dr. de Mel said the country recorded the highest budget deficit since 1981 at 14 per cent.
Former Central Bank (CB) Governor, Dr. Indrajit Coomaraswamy pointed out the Sri Lankan economy has experienced persistent and almost continuous macroeconomic stress over decades. “The negative impact of the government budgetary operations has been amplified by the fiscal forbearance by the conduct of CB’s monetary policy. This toxic combination has led to elevated inflation, high-interest rates, the unsustainable balance of payments, and pressure on the exchange rate,” he said stressing that the underlying causes of these have to be addressed.
Broadening the tax base, improving the tax administration, and the CB having sufficient autonomy to conduct data-driven, proactive monetary policy which considers the transmission lags and anchors inflation along with inflationary expectations are some of the remedial measures Dr. Coomaraswamy outlined.
He added that the CB mandate on price and economic stability laid out in the Monetary Law should take precedence over its agency functions of raising money for the government. He also said the hierarchy of functions as laid out in the law needs to be established and continued. “The institutional framework should be strengthened.” In this regard, the fortification of the fiscal rules in the current Fiscal Management and Responsibility Act and the autonomy of CB which includes reforming the CB governance arrangement and its role in the primary market for government securities was highlighted.
He added there is persistent stress in external account because of the tradables which declined from 70 per cent to 50 per cent owing to anti export bias policies.
Headaches
Dr. Coomaraswamy added the real cause of the significant losses incurred by the National Water Supply and Drainage Board, the Ceylon Electricity Board and the Ceylon Petroleum Corporation is the pricing policy these entities are compelled to adopt which delivers subsidies intended for the vulnerable, but they distort incentives, compromise the balance sheets of the two state banks and they benefit the non-poor disproportionately. By allowing the State-Owned Enterprise (SOE) performance and having a pricing policy that allows full cost recovery and get them to function on a commercial basis will ease off their burden to the government, he added. He also pointed out the lack of structural reforms in the country. “We need to do better than we have done in the past. The external debt servicing is a challenge, and the external financing gap needs to be fulfilled.”
In the ensuing discussion, Ceylon Chamber Deputy Chairman Krishan Balendra said the foreign currency shortage is hurting the business, irrespective of the type of business on imports and exports.
Of the positives, he added that some manufacturing businesses moving out of China is an opportunity that Sri Lanka can capitalise on. “Colombo is a natural deep-water port and the demand for deep water hub ports like Colombo would grow.” He said that in the IT space firms in the Philippines and India are trying to move their businesses to Sri Lanka. “Tourism in the country is recovering quickly. We cannot underestimate tourism because of the Indian travellers.”
Wrong move
Hemas Holdings PLC Group CEO Kasturi Wilson said the CB move to peg the exchange rate was counterproductive in boosting exports.
“If you want to grow exports you can’t hold that position. Exports have to be competitive. You’ve got to bite the bullet at one point. You’re not going to get FDIs with such a policy stance. Inflation is a concern. Macro conditions are bad, and we are struggling with the balance of payment. Irrespective of the bank rate or informal rate, there is no access to funds. Eventually, it has had an impact on all of us as importers. Impacts on our supplies and the policy consistency itself are an issue. I think we need to take a step back and set the macroeconomy in the correct direction.”
But the CB governor, Nivard Cabraal in his keynote on the opening day of the summit said there is no need for currency depreciation. “We need to revive our debt profile. These adjustments need to be somewhat gradual.”
Pointing out the positives, he said that every crisis has a silver lining. “We naturally had to undergo a series of debacles in our economy over decades, but never waste those opportunities arising from a crisis. After the tsunami, we built better, and after the global financial crisis, we made our financial systems stronger. In the same way, post-pandemic we will adjust our debt profile, make the external sector stronger and improve businesses. These are the opportunities before us.”
Noting that the growth was hindered with intermittent lockdowns enforced by the Government to protect the lives of the people, which also negatively impacted the livelihoods, he said there is no magic wand that can make the fundamentals stronger overnight, but CB needs to work and balance it. “Interest rates, exchange rates, and money supply are key factors for investors looking at Sri Lanka. We need to improve on all these factors without looking at them in silos.”
Taking a shot at calls to go to the International Monetary Fund for a bailout, the Governor said the only solution for Sri Lanka isn’t to go to an outside agency on bended knees and ask for aid.
Ceylon Chamber of Commerce Chairman Vish Govindasamy in his welcome address requested the Government and the country at large to use the pandemic as an opportunity to implement much-needed reforms to ensure sustainable economic growth.
International Institute of Social Studies (ISS) Erasmus University Rotterdam Associate Prof. Dr. Howard Nicholas said recurring monetary instability is due to lack of industrialisation and not because of money printing or budget deficits. “Printing money is no longer fashionable,” he said, adding that the key reason was the lack of industrialisation. “Countless studies have revealed that foreign debt serving issues, and low economic growth are due to lack of industrialisation.”
He said the Colombo Port City would be a great opportunity for Sri Lanka, which offers different incentives to lure investors.
Asian Development Bank Regional Economic Advisor – South Asia Regional Development Rana Hasan said that South Asian countries need to upgrade their global competitiveness, move up the global value chains to unleash their true potential in industrial development.
“Urbanisation and land management are some of the lessons Sri Lanka can learn from the successful East Asian economies. The investors need to be provided with vibrant and flexible amenities.”
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