'Knowledge Economy concept gains momentum'

Secretary to the Treasury Dr. P.B. Jayasundera delivered the keynote speech at the Capital Market Conference 2014 on Thursday.

Excerpts from the speech:

This conference is taking place at a crucial time. The President will present his 10th consecutive National Budget soon, spelling out the policy direction of the past 10 consecutive years of transformation of the economic landscape of our country, in terms of the outlined direction.

Although there was a reference made last weekend in the media that the 2015 Budget will be a bag full of Election Goodies, I can assure you that it will be a development oriented Budget that is in line with the direction so set, with significant emphasis on the Knowledge Economy concept which has gained momentum.

The conference is also taking place at an important juncture when there is a significant worldwide focus on Sri Lanka's economic prospects. It was only two weeks ago that the Prime Minister of Japan and the President of China concluded two historic State Visits, creating a new wave of economic cooperation with the two largest East Asian economies.

The committed foreign direct investments is well over US$ 2 billion, on initiatives to promote tourism and aviation as well as trade and finance, which are of significant importance to the country.

The two leaders of China and Sri Lanka also witnessed the launching of the Free Trade Agreement between the two countries, which is to be operationalised by mid 2015.

Sri Lanka's Capital Market also cannot find a better time than this to host this conference.

The All Share Price Index reflected the recent economic successes by rising from 1,800 to 7,200 level.

The average daily turnover at Rs. 1,200 Million – three times higher than what it was five years ago. Foreign investor interest has surged with 30 percent of the market turnover.

The total net foreign inflows during the past five years was over Rs. 100 billion of which Rs. 10 billion was during this year – so far.

The net value of Unit Trusts has shifted from less than Rs. 7 Billion to over Rs. 75 Billion and the value of listed debt has increased from Rs. 12.05 Billion in 2009 to Rs. 68.7 Billion by end 2013.

The market capitalisation is now over Rs. 3 trillion, an appreciation of 300 percent.

So, all sounds good for the industry participants and investors as the market has grown well on a diversified basis and underscores country's economic prospects.

The topic of Asset Markets has attracted global attention in recent times with assets bubbles in well established markets that have compelled everyone to take note of underlying risk management challenges.

Understanding this is difficult when the ‘going is good’ since the tendency is to forget everything and feel good, but when the ‘going is bad’, everything becomes amazingly hard. We must not permit good times of today, to be the sad thoughts of tomorrow.

As William Feather, the famous author and publisher from America once said, "One of the funny things about Stock Markets is that every time one person buys, another sells. Both think they are astute.”

Then Warren Buffett, the American business magnate, investor and philanthropist, constantly ranked as one of the wealthiest people in the world has a different viewpoint hinting on underlying uncertainties. “I never attempt to make money on the Stock Market. I buy on the assumption that they could close the market the next day and not reopen for five years.”

Then, any ordinary person is bound to get confused from a view expressed by Suze Orman, the American Financial Advisor, Motivational Speaker and Television Host who said “I have a million dollars in the Stock Market, so if I loose a million dollars, I do not personally care”.

As much as you are engaged in managing this paradox, I am placed no better, since your ups and downs become invariably my problems as the Finance Ministry Secretary, particularly when you are not doing well. I witnessed this a couple of years ago.

Yet, we all need to find a way forward with this paradox. This is the hard reality at all times when managing Governments. The multi-million dollar question is ‘How do you keep all stakeholders happy?’ This dilemma is becoming more and more complex in an emerging globalised world.

I thought of speaking on ‘Takeoff to a High Altitude – The Transformation of the Economic Landscape in Sri Lanka’, since it will help me to articulate the underlying national vision for economic advancement in Sri Lanka.

This is relevant particularly in the context of country's aspirations towards the realisation of 20/35 economic millstones, specifically surpassing US$ 7,000 per capita by 2020 and graduating to a transition towards an advanced economy by 2035.

There is no doubt that we need a strong financial system and capital market, among many other building blocks having to get into the proper context to raise investments of over 40 percent of GDP.

There will also have to be a highly skilled work force within a strong regulatory and institutional framework if this journey is to be made unstoppable.

Therefore, at the outset of my speech, let me talk about how the Sri Lankan economy is evolving at present to relate my topic in the proper context.

The Sri Lankan economy has been on a high growth path of 7-8 percent per year since 2005 under the policy framework adopted in terms of Mahinda Chintana: National Vision For Development.

The economy is increasingly driving globally integrated manufacturing and high technology industrial activities and breaking ground into new areas such as IT related services, diversified tourism, shipping, aviation, banking and professional services that push the service sector beyond 60 percent of GDP reflecting how well policy reform initiatives, public investments and the restoration of peace and security pay dividends.

It appears that any growth below 6 percent is now considered low in terms of our aspirations, and in terms of the lead Sri Lanka has taken among emerging Asian economies.

Considering the fact that Sri Lanka has a strong rural base, and since the Labour Market is well integrated with overseas employment and youth aspirations are aimed at finding new generation jobs, what we are compelled to accept an inevitable that no growth rate is workable unless it is associated with high end economic activities that generate high income earning employment opportunities, particularly for skilled workers and professionals, as labour is as mobile as capital in an increasingly integrated global economy.

Hence there is a compulsion to pursue human capital development as a priority to push the economy towards a knowledge and skills centric emphasis.

In terms of Mahinda Chintana: National Vision for Sri Lanka, economic growth cannot be only for higher income earners who are enjoying above US$4,000 per capita already but also for those below as well.

Hence, income distribution and welfare aspects also become interwoven with the process.

The Government also attaches a weight to environment and bio diversity aspects to differentiate Sri Lanka from many of its competitors and for the Sri Lankan economy to maintain an edge in terms of comparative advantage.

These are the multi facetted considerations the Government has placed emphasis on within the national policy framework.

This year's growth is projected at 7.8 percent, which appears to be a reality with the first half growth figures at 7.8 percent and the medium term growth outlook of around 8 percent per annum, which underscores an increasing trend towards a value chain growth in primary, secondary and services activities and the structural shift in the economy towards a service sector led economic drive, although primary agriculture and manufacturing sectors fuel the engine of growth.

Inflation is low single digit at 4.5 percent at present and the nominal growth is driven by a high real growth.

What we have seen for years is higher inflation driven nominal growth rates.

The desire to consolidate with low single digit inflation and bring the interest rate and exchange rate policy environment, around which price stability will consolidate, is becoming the monetary policy goal.

This is no doubt the way to move forward, by de-risking the economy and containing speculative business behaviour in capital and assets market transactions, to place our country on a long-term sustainable development path.

In the backdrop of a steady build-up of external reserves surpassing US$ 9 billion, we could hope to have reserves to give full cover for market borrowings.

We should now target external reserves equivalent to annual export earnings, instead of targeting the conventional import need in terms of number of months.