Financial Times

Priority for growth in interest rate policy - Amunugama
Finance Minister Sarath Amunugama visited Tokyo recently for talks with Sri Lanka's biggest bilateral foreign aid supplier. In this interview, he discuses the nature of Japanese support for the country's economic development. Amunugama also speaks about the status of reforms in the power sector, which he calls the Achilles' heel of the economy. He was sharply critical of the CEB and CPC which, he said, were blocking reform efforts, crippling the state banks and dragging the economy down.

During your recent visit to Japan one of the issues discussed was support for the power sector. Could you describe what sort of support Japan has promised for power projects?

Japan is our main development partner. We get the highest amount of foreign bilateral aid from Japan and Japan is the country that gives us the largest sum of aid by way of grants. After the tsunami, Japan was the first country to convert its pledge of granting cash relief to actual practice. We signed up for $81 million as an outright grant which is the highest grant that Sri Lanka has ever received. So we thought that it was necessary to go to Japan to discuss our strengthening relationship.

It also marks a shift of policy. In the past, Sri Lankan governments were discussing their economic plans only with the World Bank and International Monetary Fund. We have shifted that to emphasise our consultations with major bilateral donors like Japan, India, China, Germany, the US and the EU. This means that we will be discussing our three-year budgetary prospects with these countries bilaterally and securing long-range commitments.

Up to now Japan has been providing assistance in terms of project aid. This time we were able, by mutual consent, to upgrade our talks from purely project proposals to a broad general understanding about the budgetary framework we envisage for the future. Our proposals were met with great acceptance by the Japanese government.

Of the $250 million pledged by the Japanese Prime Minister Junichiro Koizumi in Jakarta as tsunami relief, $250 million will be disbursed through the UN and multilateral banks.

The balance $250 million will be given as direct grant aid to affected countries. Accordingly, Sri Lanka has been earmarked $81 million and the agreements have already been signed. In addition to this, Japan has traditionally, either through JICA (Japan International Co-operation Agency) or JBIC (Japan Bank for International Co-operation), assisted Sri Lanka in a wide range of development credit particularly in infrastructure development.

This envisages a close examination of the power sector, which is the Achilles' heel of the Sri Lankan economy. Today, the CEB and the CPC are badly in need of reforms. They are major loss-making agencies that are pulling down our development effort. Unless these sectors are reformed and made more efficient it is a big joke to talk of rapid economic development.

The economic development of Sri Lanka needs at least a 10 percent growth every year of our energy capacity.
Thanks to delays in Norochcholai, Upper Kotmale, Kerawelpitiya and a host of such projects, we're now rapidly falling behind. In the event of a drought our hydropower systems fail and the CPC has to pay exorbitant prices for imported fuel.

As a remedy, the private sector has been brought into the power and energy sector and these two energy corporations have been trying their best to block these more efficient systems rather than putting their own house in order.

The CEB and the CPC have got their priorities very badly mixed up. As a result, two corporations, which should be in the forefront of economic development, are dragging the Sri Lankan economy down with known-on effects on the banking sector from which they have liberally borrowed, thereby shutting out necessary credit for economic development of the country.

They are now in the process of crippling the banks because of their lack of management. In this context, Japanese assistance to increase the energy capacity of the country becomes vital and I was able to discuss this aspect not only with the Japanese minister of finance but also with JBIC and JICA.

What specific projects are being discussed?
We have asked firstly, assistance for improving the delivery system of the already installed capacity in power transmission. There is an unacceptable loss of power in the process of transmission. If we can remedy these losses, which are incurred due to bad planning, bad management and corruption, we'll be able to save the equivalent of Norochcholai - of around 300MW. We are also discussing funding for Norochcholai and Upper Kotmale. There's another possibility of a power plant in Hambantota on which we are negotiating with Japan and other countries.

What is the status of the petroleum sector reforms and the entry of the third player in the retail business. Has the government signed a deal with Bharat Petroleum?
There is the need for three players in distribution. Even more than that, there is the need for modernising the distribution system.

Today the old petrol sheds, which were run by the CPC, resemble urinals more than proper petrol distribution outlets. Any consumer can see the difference between the old petrol sheds and those set up by IOC (Indian Oil Corp) and Ceypetco. The recent IOC share issue shows that investors are wiling to put their money to modernise the distribution system without being a burden on the government. The CPC is not in a position to modernise its plant.

The Treasury is looking at the possibility of improving and upgrading our refinery which is now over 40 years old. This should be the main concern of all players related to the CPC and not the distribution network. In my talks with the unions I have clearly emphasised that the Finance Ministry is ready to find the money for a large-scale expansion and upgrading project for the refinery.

Part of these funds can come from the money recovered from the third player which is close to $90 million. Otherwise, the poor tax player in Sri Lanka has to bear the burden of undertaking very necessary improvements to the refinery. It is high time that people in the power sector get their priorities right and not follow a dog in the manger policy.

It is a criminal waste not to utilise the storage tanks in Trincomalee which Sri Lanka inherited from the British. What better country than India to jointly use these storage tanks with Sri Lanka given the geopolitical realities of our region?

Is Bharat Petroleum going to be the third player? What is the status of the talks with them? The unions have threatened to strike if the deal with Bharat Petroleum goes ahead?
Let's leave it at that. That's all I can say at the moment. This is the thinking behind it.
The final decision regarding these matters must be taken by the Power Ministry.

From the Finance Ministry we can only indicate rational objectives which have to be followed if this country is to be set on the path of economic development. The tragedy of Sri Lanka is that people are not willing to take decisions which are vital for economic growth.

So it is up to us to choose between a very obvious growth path or cater to a handful of politically motivated workers many of whom found employment through the back door.

There is some concern in certain quarters that if the third player is another Indian firm, India could end up dominating Sri Lanka's power sector?
I have given the reasons for our thinking behind it.

The tax amnesty which this government repealed uncovered a lot of black money. Is the government going after these people who have accumulated such wealth?
Our policy is not to increase taxes but to ensure compliance on the one hand, and to spread the tax net as wide as possible, on the other. The amnesty was revised by us to confine it only to income tax. The previous government provided relief for drug smugglers, currency racketeers and confirmed criminals who even refused to pay monies ordered by the courts. Of course, the government will go after them. Already, in terms of the law, these people have been called upon to pay.

There have been allegations that this government is, or has been, printing money to fund the budget deficit? That it has been making use of captive funds like the EPF and ETF?

This government has to now revise the notion of the budget deficit. In the first place, we'll be saving $500 million by way of debt postponement. Equally, the strengthening of the rupee will relax the pressure on outflow of capital as payments for petroleum etc. So all in all, there will be much less need for printing money as compared with the UNP administration, comparatively.

We're getting much more foreign exchange, spending less rupees on imports because of the strengthening of the rupee. Oil prices have come down. So this will make economic management much easier and better than that of the UNP administration, which was being covertly supported by the media in this country. We have been able to confound the so-called economic columnists of the media. I suggest to the editors that they re-examine the competence of these so-called economic columnists and lately, they have been attacking each other in the columns of the local newspapers.

The pressure to use domestic savings will be eased by the debt postponement. What the critics are talking of is conventional economics. That has changed by the inflow of capital and the deficit will be reduced by the non-payment of the debt.

Under the current interest rate policy, with inflation running higher than interest rates, it is said that savers are being cheated because they are getting a negative return?
That is not a big discovery. All over the world where there is inflation if interest rates are not raised deliberately there will be a certain increase in inflation. That does not amount to cheating.

Then the whole capitalist world must be cheating on savings. We have to adjust these things over time. One has to look, on the one side, the interests of the people who are saving by guaranteeing them reasonable rates of interest. On the other hand, we cannot stifle economic growth by having high rates of interest. So we have taken a policy decision to give priority to growth.

Back to Business