Time for rational economic decisions - Dr. Sarath Amunugama

By Uditha KUMARASINGHE

Senior Advisor to President on Economic and Monetary Policy and Deputy Minister of Finance Dr. Sarath Amunugama said with the war over and the global oil and the financial crisis coming to an end, a new era is opening for Sri Lanka where we can seriously think of a development decade. Dr. Amunugama in an exclusive interview with the Sunday Observer said we can look forward to a period where rational economic decisions can be made with the support of Parliament as the President has got an unprecedented majority. The forthcoming Parliament with a lot of well educated young MPs will be more practical and broad oriented and less ideologically bound. he said.

Q: Although there are critics who say that the President has given you only a Deputy ministership, it is a very crucial and powerful one. How do you view this challenge?

A: Our main objective in the next six years is to vastly improve the economy of Sri Lanka. Earlier we had a problem with war and it was difficult to think of long-term strategies while our financing of the war went. The normal investment program was distorted. With the conclusion of the war, now we can enter into a new phase of economic growth. There is another reason which is encouraging. That is the world is now emerging from the global crisis. During 2008 and 2009 when the global oil crisis hit us, it had a severe effect on all the sectors of our economy. To give the simplest explanation with the price of oil not only our oil bill but all imported commodities went up in price. This in turn led to rampant inflation. Money which were required for investment and growth had to be diverted for the purchase of these essential commodities like oil etc. Now that period is over.

Today the oil prices are in the dollars 75 to 85 corridor which is manageable as far as the Sri Lankan economy is concerned. Even within this corridor, we are now seeing the bottom end. So we are fairly comfortable with the oil situation. You can see the immediate results of that in the coming down of inflation. We are having very low inflation figures which is a very healthy time. So with the war over and the global oil and the financial crisis coming to an end,a new era is opening up for Sri Lanka where we can seriously think of a development decade. That is the question where we are in. So that growth has to be planned and funded and managed principally by the Finance Ministry. So this is a very important and responsible assignment.

Q: Do you think that the formation of a stable Government and the dawn of peace have contributed positively to boost our economic prospects?

A: Definitely so. Earlier when we were looking for an economic growth, one of the obstacles was the instability of the Government. We know that in 1994, the PA Government had only a majority of one. Then we had an era of coalition politics, crossovers, JVP walked out and a series of activities which destabilised the growth. I remember the time when in the Ministry of Finance, we could not take certain reform measures particularly in the CPC and the CEB because of the volatile political situation. The JVP virtually had veto powers over the economic policies. Now that is not there. President Mahinda Rajapaksa has got an unprecedented majority. So we can look forward to a period where rational economic decisions can be made with the support of Parliament.

The complexion of the Parliament today specially with a lot of well educated young MPs will give the feeling that the forthcoming Parliament will be more practical and broad oriented and less ideologically bound. That is also an element which we have to consider favourably. Another element which we have to consider favourably is that our long-term investment particularly in infrastructure is now beginning to pay off. It's like a flower beginning to bloom. If you come to Galle Face, you can see the new South Port Development taking place and a new breakwater being made. Then the Southern highway is ready and the Colombo-Katunayake highway is under construction. Norochcholai phase one is now successful. Kerawalapitiya will now also be giving power to the national grid. Kothmale first phase is over while the Hambantota harbour is proceeding very satisfactory. We are seeing the beginning of a period when our infrastructure projects are coming into fruition. This will naturally add to the value of the country which would reflect itself in an increasing GDP growth.

Q: Why it is necessary to present a mini-budget first and then later a full budget? The Opposition says that the Government is unable to present a full budget due to various IMF conditions? Is there any truth in this ?

A: No the position is that we will be presenting a budget during the mid term of this year. There was a vote-on-account upto April. Upto June expenditures are approved by presidential decree. This will have to be followed by a budget for 2010 which will incorporate the expenditure upto June and what is proposed till the end of the year. So we will have a budget. But the real budget which will encompass the concept of Mahinda Chinthana will emerge hopefully in the budget that will be presented in November this year which will present the estimates for 2011. So in effect this year, we will have two budgets. One budget which will incorporate the development in 2010 and a fully fledged budget for 2011 will be presented the Parliament in November.

Q: Is there any doubt about receiving the third part of the IMF loan? Can we do without it?

A: We have to be clear what this is all about. We have negotiated a standby arrangement with the IMF for 2.6 billion US dollars to be given in 8 tranches. Two trenchers worth approximately 650 million US dollars have already been received. The new Government being formed only few weeks ago and also in terms of our original agreement with the IMF, a joint review is being undertaken now and its report will be submitted to the IMF Governing Board by the end of June. I must say that we have been very much in line upto now with the fiscal understandings which were discussed with the IMF and I don't anticipate any difficulty in terms of exchange rates or interest rates. Many of the matters pertaining to policy grates have been very satisfactorily achieved. We are confident that by the end of the year because we have played by the stipulated period of one year. Even the discussions we have had regarding the budgetary gap can be satisfactorily resolved. I don't see any difficulty to obtain this IMF loan. The regular review is now under way and the Board will take a decision by June regarding the tranche number 3 and 4 together. At present we are on track and we are quite optimistic that the matter will go forward.

Q: The same goes for the GSP plus. Is there a mechanism to avoid any fallout if we do not receive it?

A: The EU has said that the matter is still open up for discussion. Prof.G.L. Peiris who is in charge of this subject as Foreign Minister, there is a new team handling this subject. So I think we can make some progress very soon. Quite a number of the contentious issues have been resolved. One of the arguments we have advanced for retaining GSP is the need for rehabilitating the industry in the North and the East. This is something that is high priority among the European nations. I must also say my personal view that with the fall of the Labour Government which was taking a very anti-Sri Lanka line because they were being blackmailed by the LTTE diaspora, the situation will now improve. I think the Conservatives have a more realistic view and less domestically politically motivated view of this issue. I must mention at this stage that all political parties in Sri Lanka must support our attempt to continue with the GSP. The Opposition should not use the GSP issue to get sectarian advantage. They tried it at the last election and it has failed miserably. This is high time that they should join the Government by asking the new Conservative Government and the EU to continue with the GSP plus facility for Sri Lanka.

Q: Will it be possible to reduce the budget deficit and the inflation in the short-term?

A: Inflation has already been brought down to a very low level. I find the Opposition is harping on this matter. But it is very obvious that when fuel prices come down, commodity prices come down. Their intact on the inflationary situation becomes less than less. When these global prices come down, then inflation will also come down. Earlier when it went up, inflation skyrocketed. The global scenario is favourable to a low inflation regime. That is to our benefit now. Because our inflation in the past was also externally led when oil prices and commodity prices went up and the taxes went up for insurances and various other things. overseas shipping costs also went up. All these led to a high inflation rate.

When the original reasons are controlled, there will be a less inflation here. Inflation is not going to be a big problem as long as the external factor is taken into account. I must also mention one thing that is at the top of the global crisis, the Government brought a rescue package. The Government had to forgo a large amount of revenue to implement this rescue package. Now when the world prices come down, we will have to adjust the local prices. That is quite normal. We can't compare that with the prices that were given under emergency conditions because of the global crisis as a rescue package. We will have to now get back from the rescue package. Because the country is emerging. That is adding to the budgetary gap. We have to restore the situation to the pre rescue package level.

Q: The President has created a new Ministry of Economic Development. What is the significance of this move?

A: It is very vital. This needed to happen and it needed a very dynamic Minister like Basil Rajapaksa to spearhead this growth. The country must understand one thing. We cannot go on giving these relief packages unless the wealth of the country is increased. It is only if we become richer that we can afford to give these concessions. If the country becomes poorer, we will not have the resources to do these things. The most important thing we have to do now is to make our economy grow. Our agriculture and manufacturing should have a dramatic improvement. New areas of wealth like tourism, gem and jewellery, IT and knowledge industry should be improved so that we can get more money to the country. Education and health should become areas where country earns money and not spend money particularly by way of private educational, health facilities. Those are very large areas today in the modern world where countries earn a lot of money through education and health while maintaining all the State ventures. Nobody says that the State ventures should be abandoned or reduced in anyway. They will continue. But the private sector will also increase. I think that is very good. Because then the State will also have to compete. If they don't compete, we will have a problem like what we are now having with the Pharmaceuticals Corporation. Because when you give it as a monopoly, then there is a problem. The consumer is always better off when there is competition. We have to improve every area where the country can earn money.

I think Economic Development Minister Basil Rajapaksa has a challenging job that is to increase the wealth of the country. Our GDP must grow. Only the other day Dr. Saman Kelegama has said that 10 percent economic growth is quite possible. If we have a growth like that then the problem of debt sustainability, the question of providing social welfare measures, maintaining state tenants for the poor, all these can be done very comfortably in this country. Upto now due to variety of factors such as political interference, inefficiency, over employment, this country is not getting the revenue it should get.

"For an example it's like a boy in a school who can always come first is not coming first because of various other factors. The politicians as parents should study why this boy called our economy is at the bottom of the class. Therefore this boy needs special attention to come to this potential of coming first in the class. We are a country which is coming to the bottom of the class. Earlier we were coming third, fourth in the class. Suddenly we dropped. So now that boy needs special attention. I think of the teachers who will give special attention to this boy, the main teacher will be Basil Rajapaksa. His job is to see that this boy comes to number one in the class."

"Equally one reason why the boy can't come number one in the class is waste within big monopolised State areas such as the CPC, CEB and transportation. This boy will have to be taught to improve in those areas. Sri Lanka's potential can do very well. Economists are saying that it can get 10 percent growth which is a record. It is only upto us to work hard and not to waste time and not to substitute big talks for hard work. Every country that has developed has reached to that position on the basis of hard work. The only prescription we can give from the Finance Ministry is hard and sincere work and commitment to bringing the country upto number one in the class."

Q: Are there any plans to reform loss-making Government institutions like the CPC, CEB?

A: There is. That is why even the last few days Power and Energy Minister Champika Ranawaka has said that he is going to make the CEB into a profit making institution within the next couple of years. I think Hary Jayawardene will be able to turn the CPC around. The Government is taking very firm steps to reform these loss-making institutions. You can see in the staffing, there is big change. Only the very competent people are being put in charge of these big corporations. They have to deliver the goods and the President will be taking a hard look at how they perform. The country can't afford to perform below potential. When we can be the top of the class, we cannot be behaving like a mentally deformed child.

Q: How do you plan to further integrate the Northern and Eastern economy with the rest of the island?

A: That is one of the main tasks of this Government. Because the North and the East are economic powerhouses which were not available in the past. For an example, agriculture, tourism, fisheries, ports, education and health, all these areas in the north and the East can be very big assets to Sri Lanka. We have to ensure that the economic growth potential of those areas is fully realised and that is the only way of meeting the aspirations of the people in the North and the East. They must feel that the Government is sincerely interested in developing the infrastructure and the economy and no doubt they are hard working people. We are already self-sufficient in rice. With the rice stocks coming from the North and the East, our production is very high. When the land mines are cleared and the people go back to their areas, this will be much better. Of course the Government will have to help particularly the North and the East. The Government has to help by investing lot of money to provide good water to conduct the agricultural activities in the North and the East. Now we are doing that. Infrastructure projects are also taking place in those areas.

Q: It is very difficult to shield our economy from external shocks in a globalised world. Yet Sri Lanka managed to keep its economy mostly intact during the last recession. Are we geared to face such challenges in the future?

A: In future whatever we say, we will get more and more integrated with the global economy. So we have to have a strategy where- on one hand whatever assets we have in the country like our agriculture, exports and import substitutions. All those programs must go forward. At the same time, we also must be very careful about the use of energy. We have to tap alternative sources of energy and not depend entirely on oil or coal. The new Power and Energy Minister is also talking in those terms. We also have to exploit the knowledge industry. Because we have spent so much on education and the health of our children. So we can piggy back on that to have a new science and technology orientation and a new knowledge based society. All these steps we have to take so that we can shield ourselves. Sometimes not only shield ourselves, we have to take exploit the benefits we can get from the global economy. I think more than shielding, we have to think of how we can exploit. That is what China, India and Vietnam is doing. So we should try to exploit the good global connection rather than taking a negative view and say that we should hide from the globe. That is not possible. Some of these leftists are talking like that. But that is simply impossible. It is much better to take a positive view for us to exploit what we now called the globalised aspects of the economy.

Q: Is there any short or medium term plan to reduce the cost of living?

A: The cost of living can be reduced because globally the cost of these commodities are coming down. When they come down, the cost will naturally come down. The Government has to take note of that but also not import them at the lowest cost so that the domestic industry does not get wiped out. We have to put certain taxes and the consumer also has to help by bearing this burden in order that our domestic manufacturers and domestic producers are also not wiped out. The Government is always balancing the requirements of the local manufacturer and the consumer.

The Finance Ministry is also trying to keep a balance and looking at the global prices and the needs of the local economy. So it's a balancing act.