Sri Lanka becomes a role model:

Global recognition for a well-managed economy

By Uditha KUMARASINGHE

*Eight percent target growth and stable exchange rates

*President created greater awareness of our achievements

*Favourable weather gods

*Improved power generation

Senior Presidential Advisor and Deputy Finance Minister Dr. Sarath Amunugama said Sri Lanka has become a model on how an economy should be well managed. At present there is global recognition that the Sri Lankan economy is well managed. Dr.Amunugama in an interview with the Sunday Observer said President Mahinda Rajapaksa went to UN at a time when we are getting credit for defeating terrorism and putting the economy on a growth path.

Q: How does the 18th Amendment and other constitutional changes ensure economic and political stability in the country?

A: Actually the 18th Amendment has its impact on the political and the economic future of the country. These two are intertwined. We need more investment in the public and private sector to achieve our goal of 8 to 9 percent GDP growth. Investors are always interested in the returns on their investments. People don't throw money around. They look for stability in the country. Stability and predictability is very necessary if we are to attract more investments. When there is a war, investors tend to shun that country. That is true not only for Sri Lanka but the world over. Now the war is over and the LTTE has been defeated. Now we have to look at the stability in the country. Stability is judged by the presence of democratic process. We are very fortunate in that Sri Lanka is a democratic country. Investors prefer to invest in a democratic country where there is the guarantee of continuity.

The 18th Amendment ensures sustainable development. The President can now go for a third term, if he so wished. We had Provincial Council, Parliamentary and Presidential Elections. In these three elections, we presented to the country a common program. The voters overwhelmingly endorsed the "Mahinda Chinthana Idiri Dekma" common program during these elections.

If the President had only two tenures as earlier, the latter part of the second term would have inevitably led to some degree of confusion.

Wherever there is this two term provision, the latter part of the second term very often leads to some conflict or attempts by various groups to pander to the candidate who is going to be the next President. That was the situation in Sri Lanka and in many countries as well.

Q: Sri Lanka recently received another tranche of US$ 213 million from the IMF. Do you see this as an indication of the international community's confidence in the Sri Lankan economy?

A: Yes definitely. The IMF gives that disbursement only after making a comprehensive evaluation of our economic policies and the success or failure of them. Before this tranche was approved by the governing body of the IMF, a report had to be submitted by the IMF officials in charge of the Sri Lanka stand by arrangements.

The approval was given only after it was tabled at the governing council. It was not so easy as to secure the approval as first time. There were some countries which abstained and voted against us. This time we have had a clear passage. It means that we have been given a clean bill of health judged by international standard of economic management. Some people tend to forget the fact that the IMF conducts surveys like this for every country. The IMF global report covers the economic development of every country. Now Sri Lanka has become a model for sound economic management. There are other factors too which justify our management of the economy. There are global rating organisations. We have Standard and Poor, Fitch Ratings and Moody's. These are the three rating agencies.

All these three have upgraded Sri Lanka.

They have given B plus rating and also brought the definition upto stable. This is something done quite independent of the IMF. That is the second category.

In the third category, all the leading banks such as Bank of Scotland, Standard Chartered and Deutche Bank have their very strong research divisions. They do country analysis.

They also do their internal ratings. Even they have shown that Sri Lanka is positive. When we look at our bond issues, they have all been oversubscribed at the interest rates which are coming down more competitively. All these show that there is global appreciation or global recognition of the fact that the Sri Lankan economy is well managed.

Q: The Colombo Stock Exchange recently surpassed the 7000 mark for the first time. How do you view this achievement?

A: This is a very desirable trend. Sri Lanka must do two things. We are too much engaged in private companies and therefore we should encourage them to access the Stock Market.

They should issue shares and the public should be contribute. This will help in two ways. Firstly they will get greater capital once they have shares which are appreciative. Secondly, there is a greater accountability. Shareholders will want greater accountability on the part of the people who are trading their shares.

That is the first step and we will find more and more companies. You would have seen so many IPOs coming into the stock exchange. That is a very good trend. Other companies should also try to come into this. When the Stock Market is booming that is an incentive for these companies which are outside the Stock Market to come and test the value of their company in the Stock Exchange. That is one favourable development.

Secondly it attracts other capital as well. Now there are two factors. One is the speculative factor. The people know that the economy is growing.

There is an appetite for more and more stocks. Due to the defeat of terrorism and good management of the economy, people know that their money will bring more returns.

They come to the Stock Exchange in larger numbers than before as they see a brighter future; Most of the big foreign investors are also coming in. Some of them left during the economic downturn. At the beginning of our foreign exchange crisis, I believe US$ 600 million were pulled out. Now such assets are coming back because basically there is confidence in the economy. It is rising. Investors have the faith that the economy will prosper further and it will be well managed. There is a long term horizon in that. So they can put their money into this.

Q: What are the benefits to Sri Lanka from the President's UN/US visit from an economic and investment angle?

A: The President went to the UN at a time when we were getting the credit for ending the war and putting the economy on a growth path. We are proud of that we had these significant achievements to our credit. The President has created greater awareness of our achievements. When the President addressed the United Nations, the premier world body he was heard throughout the world.

The UN General Assembly is the world forum where each country express its views on the global situation and their country situation. The President's address to the august assembly has generated a lot of interest among the world community.

We also attended the meeting on the Millennium Development Goals (MDG). Sri Lanka can be proud of its achievements in the MDG fields. I am not wrong in saying that of all the countries in the developing world, we are right on top when it comes to things like universal literacy, gender differentiation, low infant mortality rates, higher life expectancy and higher nutrition levels. Of course, we can improve these areas. We are a very good example of being well on our way to achieve the MDG goals.

When the President addressed the UN General Assembly (UNGA), he highlighted our achievements particularly in the social welfare areas. In the MDG meeting, the President reiterated our great successes in the social welfare field.

At the UNGA, he also highlighted the defeat of terrorism, our growth path and shifted in our approach and emphasised that we are friends of everybody. Sri Lanka is a country which is friendly to everybody. We are open to dialogue with every country. While we stand on our principles, we continue to be an open society.

Q: Standard and Poor, Moody's and Fitch Ratings have upgraded their ratings on Sri Lanka, giving a very positive image to the country. What are your views on this development?

A: As I mentioned earlier this is a very difficult analysis of an economy. Decisions in relation other business enterprises such as insurance, freight and tourism are made globally on the basis of these ratings. During the ethnic conflict, we got negative ratings. That had a bad effect particularly on our manufacturing and tourism sectors. Now they have made a very tough assessment and found that we are progressing.

They have upgraded our ratings. This is a very good signal to businessmen, shipping, insurance and to those interested in investing here. All of them now see that things are improving. They don't just say this is A, B or C. It is not a carom game! They do a thorough study and give their considered ratings. People treat them as basis for their decision making. The three companies have given a very good report. I should congratulate the Central Bank because they got down the three companies to analyse the situation. We are very happy as they have come up with the same finding that the economy is improving.

Q: Sri Lanka's US$ 1 billion 10 year sovereign bonds have been oversubscribed six times. Do you think global investors are so keen on Sri Lanka?

A: They buy these bonds for two reasons. One, whether their money is safe. Once they invest their money, sovereign bonds means sovereign guarantee. The Government is banking that and putting its value behind it. That is a very strong thing. Secondly we are giving attractive interest rates. At present the interest rates have come down. When it is oversubscribed it shows that the people are willing to invest their money even at low interest rates. It is a very good sign.

Q: All these positive developments have taken place just one year after the defeat of terrorism. How do you think the economy will perform in the next few years?

A: The economy has to perform much better. We have targeted eight percent growth and stable exchange rates. A low interest rates regime is also taking place. We want to have a rapid growth in agriculture, manufacturing and service sectors which are now in progress. We can further improve these sectors. We should try hard to go beyond. We are on a very good trajectory and there is always room for improvement.

Q: Our economy has proved to be resilient, but what are the challenges and external shocks facing the economy? Are there any safeguards?

A: During the last three years, we went through a very difficult time due to terrorism and increasing oil prices. Again food prices went up and the global economy collapsed. So it was a very difficult time. Even during that time, we managed to achieve 3 to 4 percent growth. That shows our economy is resilient. We are on a growth path. Naturally for any economy, there are risks. We have to mitigate the risks.

The first risk is what are called the shocks that come from outside. One is that the oil prices should remain stable as it is now. We hope it will remain like that. For example if it doubles, again our plans have to be completely changed. The second thing is we are assuming that the global environment is improving. It is so. But the global scene shows signing of a downturn due to variety of factors. Third one is the weather.

So far the Government has been very lucky because the weather gods have been very favourable! Fourthly our power generation is improving. We have many hydro power schemes.

If the weather continues to be favourable, we can switch into hydro power which is the cheapest. Otherwise we have to depend on more oil imports. All those factors have been controlled so far. As long as they are controlled, we can go on.

Q: How is the economy coping with the loss of the GSP Plus facility?

A: The GSP Plus is usually given to low income countries, that is least developed countries (LDCs). Anyway Sri Lanka is not a LDC. Now we are a middle income country and we would become middle- middle income country very soon.

So many concessions that are given will have to be revived. For example, we can't get very low interest credit which is given to LDCs. In Africa and certain part of Asia, there is debt forgiveness. The lending countries have written off their debts. But we can't get that benefit as we are not a LDC. Sri Lanka has a very good record in paying back its debts. But we are a middle income country now based on certain things. Even in future, it would have affected the GSP Plus. We can't deny that. Earlier it helped us in securing markets.

Now we have to cope it up. When we do business, we have to always face challenges. Our garment industry and other production areas are also affected by this. But the garment industry is coping as much as possible.

The people who have well managed with good capital can survive and go on. Those who are in the margin have to collapse. That is a normal phenomenon. So far we hope that at least our earnings from the garment sector can contribute to the country.

Q: The rupee is appreciating against the Dollar and some other major currencies. Will this be a significant long term trend? If the Rupee appreciates, how does the Government allay the fears of the local exporters?

A: Central Bank manages the exchange rates. That is one of the primary functions of the Central Bank. Strengthening of the Dollar means our foreign reserves are very good and we are strong. As an import-export country, we have to balance it and keep the exchange rates at a point which is good enough for the exporters as an export incentive.

We have to balance it always. There are certain advantages. When we pay back our debts, when importers import machinery, we have to pay less. On the other hand, tourism industry will get less of incentives if the Rupee appreciates.

There will also be less of incentives to tea exporters and garment exporters. I don't think we will allow it to appreciate to such extent. So we will try to keep it stable.

Q: What does the Government's massive majority for the 18th Amendment mean in terms of economic and political stability?

A: The country needs stability for economic growth. But we have something even more. We have stability with democracy. In other countries, they have not been so concerned about democracy and they have been going for stability. If we take Singapore, they were not bothered about democracy.

They had a stable regime. Lee Kuwan Yew regime has continued for such a long time. A certain amount of stability was there in other countries when there was a rapid economic growth. We are very proud that we have stability and democracy. That is a model that we must preserve.

Q: Will the Government be able to bring down the cost of living in the short or medium term?

A: Yes, when the inflation is low,it means the cost of living is contained. Now everybody is talking about the cost of living. But nobody is talking about the drop in rice prices.

They are complaining that tomatoes and fish prices have gone up. They always talk about the cost of living when it comes to vegetables. But those are remediable things. When they talk about cost of living, they must look at the inflation rate as well.

When inflation increase, the public sector scream that the cost of living has gone up. When the inflation is low, they keep quiet. When vegetable price go up,it should help the farmer. When rice prices come to a stable position, that benefit should go to the paddy farmer.

The Government has to balance the production side and the people who really do the work have to be paid well. The office wallahs also have to be paid but not at the expense of the people who are producing rice or vegetables.

Others are just coming to office with a big bag and expect the Government to give them a big salary. We have too much of people who are sitting down and pushing papers here and there by blocking everything. Bureaucracy is too large.

Those in the paddy fields and vegetable fields are too little. We should increase the number of people in factories, paddy fields, vegetable growing areas and reduce the number of those in offices. That is how it should be.