Time opportune to invest in Sri Lanka - CB Governor

Ajith Nivard Cabraal is a man intimately associated with the economic development of Sri Lanka. Well before he became the Governor of the Central Bank of Sri Lanka, in 2006, Cabraal was the chief economic adviser to Mahinda Rajapaksa, who was then the country's Prime Minister. Cabraal also helped formulating Mr Rajapaksa's election manifesto, the "Mahinda Chintana." Hindu Business Line met the suave and articulate Cabraal in his office in Colombo recently.

Q: How is it now in Sri Lanka, three years after the eradication of terrorism?

A: We are seeing progress. Houses are being constructed. Schools are functioning. Electricity has been restored. People are fishing, cultivating, sending their goods to south.

We have given instructions to banks to lend money. Just in one-and-a-half years, 40,000 new loans have been given (to Jaffna area). It is not easy to give small loans of Rs 300,000-400,000, yet it has been done - for cultivation, for water pumps, for tractors, roads, fishing nets. In one of my visits, they asked us to hand over loan cheques to the borrowers. I met a young entrepreneur, who said he wanted to put up an Internet kiosk. This boy would have been fighting for LTTE earlier. Transformation is happening.

Q: Against this backdrop, what challenges are you facing as the Central Bank Governor?

A: It has been an exciting period for us, because we have had two years of "8 per cent plus" growth, for the first time. We have got our macro fundamentals into reasonably good shape now. Interest rates are less than 3.5 per cent, even after making adjustments (raising) in fuel prices. (Sri Lanka raised the price of petrol from SL Rs 84 to SL Rs 114 in February).

We have got out debt ratio under control. Government debt is less than 80 per cent. It used to be 110 per cent. Reserves are at $6 billion, or about three-and-a-half months imports. Every area is doing better than in the past. We have the best indicators in South Asia.

What we are saying is, let's provide the platform for people to come and invest. FDI increased to $1 billion last (calendar) year, which was double of what it was the previous year. This year, we are projecting it at $2 billion - 100 per cent growth. Banking sector has been very stable. Now it is up to the private sector to make use of this platform.

Therefore, the platform is available for people to come and make use of. What I think is, if they come in now, they will be at an advantage because there is a certain discount factor also - the economy has still not reached very high levels.

Per capita income has gone up quite substantially. Last year, it was $2,830. We are targeting to reach $4,000 by 2015. We are on track.

Q: If FDI is rising so sharply, are you in a position to absorb the inflows? Or, are there any inflation concerns?

A: No, there is no such concern. Inflows that not connected to a project, those that come in for speculative purposes will be a problem. But if somebody brings $500 million and sets up a hotel, that is perfectly fine. That is the kind of investment that has been drawn into this country; that is why we are less vulnerable to external shocks. I think the kind of vulnerability that you are talking about will come once we reach per capita income of $4,000-4,500. At that time there will be greater attraction for speculators. Right now we are only attracting the real, serious player.

Q: Where is FDI flowing into?

A: It has come into several areas that we are keen on. One is telecommunications, which is now fairly mature and we are seeing that it is tapering off because there is not much more to come in there. Then of course, port development. Huge amount of work in port development and related activities is taking place; there will be opportunities. Then, the tourism sector, where there will be extraordinary opportunities, because we are going to more than double tourism capacity, which means more investments in roads, hotels- there are many who have come - Shangri-La has come, ITC Sheraton are on their way, Sun City from South Africa. The famous Mustafa of Singapore is going to put up a huge, 1,000-room hotel here. And all the hotels that are already here are refurbishing.

Q: So, you say that despite inflows and global commodity price rise, Sri Lanka's inflation is under control?

A: Yes, it is. Our target range is mid-single digits - 4-6 per cent. We are one of the very few countries that has made a huge adjustment in fuel prices. We could do it because we had the political stability to carry that through. We had the space to make the adjustment. We did see a vulnerability in fuel prices in August of last year but in that period our (inflation) rates were higher. Therefore we deferred it. But in January it was at the lowest. And we did it.

But if inflation grows to 6.5 per cent, I won't commit suicide. There are so many imponderables. Sometimes we have to trade off one against the other. For instance, growth was projected at 8 per cent but because of the trade imbalance, we cut to 7.2 per cent. We don't want to grow at 8 per cent and create a vulnerability. If we don't do that we are not effectively managing it.

Q: What do you think of the suggestion of rupee trade?

Perhaps a basket of Sri Lankan rupee and Indian rupee?

A: It is a good point and it has been suggested by some. But the Reserve Bank of India has some thoughts that are not in favour.

Today, we have a huge trade imbalance with India. It is a good thing because there are lot of things which will be more expensive if we import from elsewhere. But at the same time, that offer should perhaps come from India. I know that Indian currency is used in Nepal, Dubai, Bangladesh and Bhutan. So India has some experience with that. We don't. We don't have dollarization of any other currency used here - it is only Sri Lankan rupee. But at the same time, goods being quoted in a currency other than the US dollar is not something we are averse to. If the Indian authorities see it as a way forward, we will be happy to discuss that.

(Hindu Business Line)