Raising local production, key to boost economy - Dr. Sarath Amunugama

By UDITHA KUMARASINGHE

Senior Advisor to President on Economic and Monetary Policy and Deputy Finance Minister Dr. Sarath Amunugama in an exclusive interview with the Sunday Observer commented on the Government’s strategies to develop the economy and bring down the cost of living. Dr. Amunugama says the Government is anticipating a very satisfactory economic growth rate of 7 percent during this year. He said as the country’s external environment is stable, the Government is on a correct path to balance the budget to reduce the gap between our earnings and expenditure. Dr. Amunugama said we should have a certain predictability in our economy and the Government is working towards that. The Government has alternative strategies on the fast track growth, thanks to a very stable economic environment created within the country. According to him the Government in its agenda has given priority for development and price stability.

Excerpts from the interview:

This year even the IMF is foreseeing 6.5 percent economic growth. We think we will get a very satisfactory economic growth rate of 7 per cent during this year. This growth will help in creating economic stability. Growth means income goes up and it get spread among a large number of people.

There are more investments. That growth factor will be very important for the country. If we can get 7 to 10 per cent growth regularly for three, four years then the economy by itself will get its own momentum. This year we are very happy about the rate of economic growth achieved.

Sri Lanka is an economy which is subjected to lot of external shocks. Provided that external environment is stable, we are on a correct path and we have to somehow balance our budget in the sense that the gap between our earnings and our expenditure must be reduced. Otherwise we have to depend on loans and we have to depend on cutting on committed expenditure. We should have a certain predictability in our economy and we are working towards that.

One way usually the people think of that is reducing jobs and that sort of thing. But our strategy is different. We have alternative strategies. That is to fast track growth. When there is fasttrack growth and enough wealth in the country, then we can afford the social welfare network. Today even the IMF is not against the welfare net. They say the poorest of the poor must be safeguarded by the State and it is a responsibility of the State to provide those services. We have to become a rich country and we have to earn more. That is our strategy.

Compared to previous few years, our cost of living has also came down drastically. Now we have a very stable economic environment. One reason of course is that the external environment is much better now. When we pay more for oil, basic imported food commodities and for services, inflation rises. When that is controlled, inflation is also controlled. We judge inflation by a basket of goods, the rise and fall of the value of those goods. When that is stable and controlled, inflation can also be kept under check. There are so many other macro economic decisions that the Government has taken, that led to this stable environment.

Everybody is talking about the cost of living. But they don’t discuss the details. Today the price of rice is much less than ever before because of increase in production. When there is production, the cost finds a reasonable level.

At present our paddy cultivation is very good. We are getting added production in the North and the East. All that have brought us a stable price. The fluctuation occurs during the inter-harvest period. Basically in the paddy sector, we are quite all right. But in other sectors we are not anywhere there where we want to be. Basically, milk production, sugar and fisheries.

These are three areas where if we are patriotic, we must try to encourage local production. Otherwise what will happen is when the prices go up in the World Market, then we have to pass it on to the consumer.

It is useless shouting that sugar, fish and milk foods are too expensive. These are three key commodities that people normally talk about. But they are is all externally driven. We import and sell. The most the Government can do is to adjust the tariff. But that not the answer to the question. You can’t answer the question by Government depriving itself of its revenue. It is much better that we produce.

We can see a lot of money that is now going abroad for sugar, milk and fisheries. We can see the number of canned fish imported to Sri Lanka. If these three areas are localised where the local component of production is higher than before, then we will be on a easy wicket and the things can be cheaper. It is absurd not to produce locally and they start shouting saying that the cost is too much.

That is beyond the control of the Government. In very critical times, the Government for a short period of time can help out by depriving itself of its revenue. Naturally that is a short-term measure.

But the Government can’t always do that. Otherwise we have to cut down some other things. We can’t maintain both.

The real and the long-term answer is to increase domestic production in the areas of sugar, milk and fisheries.

The money that is going abroad for milk foods, sugar and canned fish should be given to our local producers. If we can effect that transfer, then it will not only solve the development problem but also solve the price stability problem as well.

Two weeks ago the Government obtained covering approval for duty reduction which were a part of the rescue package introduced during the economic down turn of 2008 and 2009. When the global down turn hit Sri Lanka, oil and commodity prices rose to an unprecedented level. This would have led to difficulties for the public by way of rising market prices for imported goods and food items. At this stage, the Government introduced the rescue package which slashed duties and passed on the benefit of lower market prices to the consumers.

Of course the Government paid a very heavy price for this slashing of duties and taxes. The Government’s revenue dropped drastically. This in turn led to a widening gap between the income and the expenditure in the country’s finance. If this continues, there will be serious repercussions. However, the good news is that the world is emerging from this recession and financial crisis and commodity prices are coming down. The price of oil has come down to around US$ 70 to 75 per barrel.

So proportionately the cost of imported items such as sugar, flour, dal, sprats and dried fish etc is much lower in the world market. As a result, private sector importers of these commodities are making a fortune. On one side they are paying less for the producers of these items who are mostly foreign sellers and on the other side they are paying less to Government as taxes. In light of the reducing prices, the Government must re-adjust its duty structure. This will not affect the consumer because importers can easily absorb this into the large margin they are making today.

Always any Government has to balance two aspects of economic life. On one side, it must have price stability so that the consumers will not be subjected to widely fluctuating prices. We have controlled that to a large extent, because inflation has been contained. The exchange rate is stable and the interest rates have come down. So there is a good environment for long-term planning of purchases in a stable environment.

Usually when there is instability in the environment traders jack up the prices. Because they have to increase their comfort zone. They can’t take a risk. When the micro economic fundamentals are in good shape, they can plan properly and think of short-term huge margin which are usually the case in crisis situation.

One of the strange things in economy is when there is a crisis situation, the traders tend to jack up their prices to cover their risk. At present, the risk has been eliminated or reduced in the Sri Lankan situation. Shipping and various intermediatory costs are also coming down. So the Government must get its share of the benefits it had derived through good micro economic policy without harming the pocketbook of the consumer.

That is also very important. Price stability is on one side. On the other side the Government is forced to increase its revenue. Otherwise it can’t develop the country.

The money that is used for the major projects generated either through the loans or domestic savings. Any Government has to very sensitively balance the question of price stability and growth. That is what we are trying to do now.