Macroeconomic foundation laid for unstoppable marathon

"President Mahinda Rajapaksa has woken up the (Sleeping Lion of Asia) and prepared him for a long marathon of high economic growth in excess of 8

percent per annum," said Treasury Secretary Dr. P. B. Jayasundara, addressing the 60th anniversary of the Central Bank recently. Following are excerpts from his speech:

This unstoppable marathon for which the macroeconomic foundation

has been laid through collaborative work by the Government and the Central Bank during the past five years, demands greater collaboration between the two institutions towards managing macroeconomic challenges in the emerging market economy environment.

Paradigm shift

The paradigm shift that has occurred in this country in 2005 under the Mahinda Chinthana Vision for the Future may transform the Sri Lankan economy from a deficit economy to a surplus economy.

The country may witness an emergence of several extra export and foreign exchange earning activities. You may see an export structure that will reflect new areas of exports beyond tea and garments and include more value added manufactured products as well as IT and enabling industries that generate over US$1,000 per annum by each activity. These may raise our export earnings by US$ 3-4 billion over the next 3-5 years.

In the import structure, reflecting the deep commitment of this Government towards food and energy security, new imports competing economic activities in energy supply and related industries and food production may take place.

In terms of current prices these may replace at least a billion dollars of imports to this country.

Knowledge based economy

In terms of the Government's vision to create port and aviation hubs as well as a knowledge based economy, Sri Lanka may also see a future of a rapid surge in export of services and skills generating huge inflow of foreign exchange strengthening the service account as well as income account of the Balance of Payments.

The remittance earnings supported with a knowledge based economy driven by high skills and professionals as well as knowledge based industries such as IT, research and associated business establishments may create an entirely new dimension in the real economy which has been explained in the past with primary and secondary economic activities only.

Imagine the impact of a US$ 8 billion remittance income instead of the projected level of US$ 4 billion for the current year in our banking system and on the real economy.

Tourism and associated leisure industry activities are also likely to alter the Sri Lankan economic landscape into a different perspective both in terms of foreign earnings and foreign and domestic private investments.

All these, may be seen by some with skepticism and some others by historical influence in their mindset, as not feasible. But some may still give the benefit of the doubt, in favour of this scenario and visualize a surplus in external accounts and corresponding real economy under this scenario.

If one starts from the Balance of Payments, it may be seen as a story of external assets build up, far beyond one would probably imagine. But that is not the end. A large and continuous build up of external assets eventually will exert pressure to strengthen exchange rates. This means that this country will need a much stronger productivity drive in all sectors in the economy.

The practice in the past was to accommodate inefficiencies through exchange rate depreciation. Economists relied on the calculation of real effective exchange rate to use as a policy tool to guide the exchange rate devaluation to maintain competitiveness in external trade.

The emerging scenario suggests the limited use of these indicators and the need for new analytical information, tools and skills to manage financial flows, trade and real economy linkages. All emerging market economies are facing this challenge.

Similarly, the Government in its medium term road map presented in the 2010 Budget Speech has committed to a gradual reduction in fiscal deficits and thereby a debt to GDP ratio below 70 percent. This means that claims by the Government on the Central Bank and the banking and financial system will also decline gradually.

The increased availability of funds in the hands of banks and financial institutions will eventually compel banking and financial institutions to work in a low interest rate regime which they have never experienced in the post-1977 economy in Sri Lanka.

The low interest rate regime will also compel them to look for medium to long term financial instruments

as well as alternative banking products to mobilize funds. Provident funds and other institutional investors may be required to look for long-term equity and debt instruments outside the Government.

Emerging economy in Asia

The current investment level of around 24-26 percent of GDP is expected to move towards 33-35 percent of GDP largely with the increase in domestic and foreign direct investments. The underlying real economy supports a wider middle income population with different spending priorities and demanding goods and services emanating from the service economy than from the primary sector. This macroeconomic scenario points to a per capita income of US$ 4,000 as targeted in Government economic policy strategies. Of course, this is the direction as far as I see, the Sri Lankan economy is heading in the next 10 years as an "Emerging Economy in Asia".

This paradigm shift in our economy will certainly elevate the Government - Central Bank relationship also to new heights.

At this 60th Anniversary, my message to young career Central Bankers and Finance Ministry officials is to get ready to manage this emerging scenario which requires a higher level of competence, skills and sophistication to perform your tasks than what we have had in the past.

The Bank-Government relationship for the future therefore needs to be built not only on the historical experiences that the Bank and the Government have already gained over the last 60 years but also on new knowledge and vision that is needed to manage a sound monetary / fiscal

policy collaboration and a strong regulatory environment for a financial system that will support high economic growth with stability.

Our own creation

Sri Lanka is a middle income country and within the next 5 years it can very well be one of the most promising emerging market economies in Asia. The Government has committed to navigate this task and commands all necessary resources - political and global economic environment and a strong leadership.

The relationship between the two institutions therefore needs to be further strengthened through coordinated macroeconomic policy management and a policy dialogue on the basis of the common vision that has been placed before the country by the President.

We all need to be fully conversant of the policy strategies and the paradigm shift that the Government has made.

It is not a re-branding exercise for Sri Lanka or one designed by outsiders. It, as the President said at the opening ceremony at the new port at Hambanthota recently, is our own creation and one that can be delivered only by us.