By Mangala Samaraweera –
It is a pleasure to address the inaugural meeting of the Breakfast Buzz series organized by the American Chamber of Commerce. On the eve of the budget, I believe it would be an opportune moment to engage the business community on the economic situation and share some thoughts on our broad plans and strategies.
In fact this is the first time that I am addressing the business community after our government was re-instated in December following the 52 day coup. It has taken a great deal of hard work to bring us back to stability after the cataclysmic disruptions to the economy during that period. Let us refresh our memories.
In the lead up to October 26th, our government had brought stability to an economy that had been adversely affected by successive years of drought that debilitated rural incomes and hurt consumption across the economy. Global oil prices had doubled, and the US Federal reserve was ramping up interest rates, driving capital out of emerging/frontier markets.
However, from end October global oil prices began to decline sharply, the Federal Reserve signaled an easing of their stance, and the consumption began to recover in the fourth quarter. Without any disruptions, Sri Lanka would have been able to enjoy a robust boost to the economy and we would have seen a strong uplift in economic performance in 2019. Unfortunately, Sri Lanka was deprived of the opportunity to benefit from these emerging tailwinds as we got engulfed in a political crisis.
The resulting loss in confidence resulted in a surge in capital flight from our debt and equity markets – bleeding over a billion dollars from our hard earned foreign reserves and causing the currency to depreciate at a time when other emerging and frontier market currencies were recovering. Sri Lanka’s credit ratings were downgraded resulting in our external borrowing cost surging into double digit levels just when we had to re-finance US$ 5.9 dollars of external debt repayments in 2019. Tourist arrivals stalled soon after Sri Lanka was adjudged the best travel destination by Lonely Planet and a new campaign had just been launched.
Furthermore, government cash flows were disrupted as the plans to raise capital in the last quarter of 2018 could not materialize and without a budget in November spending plans were also disturbed. As a result we are still behind target on cash disbursements which would have typically been settled in January.
It was in this context that our government came back into power on December 17th. We have since repaired the damage to our external sector and markets have regained confidence in the last 2 months. Today our external borrowing costs have declined by over 200 basis points – assuming US$ 3 billion in fresh borrowings this year, that translates into a saving of over Rs. 10.8 billion. Foreign capital is now flowing back into the economy with Rs. 8 billion inflows into government securities since January – and the rupee has also appreciated 2.3% year to date.
Therefore, a lot of the damage from the coup has been addressed and the economy has again been stabilized. We are now looking forward and focusing on rebuilding and re-positioning after the disruptions. We have three major economic policy priorities;
Ensuring our continued access to global capital markets at an affordable rate to enable us to re-finance external debt this year.
Uplifting economic growth through Enterprise Sri Lanka and Gamperaliya.
Continuing our reform programme to build competitiveness of the economy.
A lot of work has been done to ensure the first priority. A key element of this would be the continuation of the IMF programme which will signal to markets our continued commitment to disciplined, rules based economic management. The IMF staff mission is in Colombo this week continuing negotiations with officials of the Treasury and Central Bank. Our objective is to ensure responsible fiscal policies whilst enabling space to invest in targeted growth supportive measures.
By targeted growth supportive measures, I refer primarily to Enterprise Sri Lanka and Gamperaliya. As you are all aware, Enterprise Sri Lanka is a programme to support private investment in small business, start-ups, and drive entrepreneurship. Sri Lanka has for too long relied on hand outs and artificial consumption booms to drive growth.
These are unsustainable measures that have repeatedly resulted in balance of payments crises. Enterprise Sri Lanka will drive growth through private investment and expand economic capacity for future growth. We have already seen over Rs. 70 billion in new credit disbursements going into SME exports, agriculture, and the service economy.
In parallel, Gamperaliya is a rapid rural infrastructure investment programme. The need of this was highlighted due to the droughts that adversely affected cash flows into the rural economy. By October 2018 Gamperaliya was fast tracking investment into rural roads, small markets, and irrigation – and importantly putting cash back into the hands of the rural economy. This is no doubt one factor that supported the recovery of consumption in the fourth quarter of last year. In fact given the success of Gamperaliya, one of the first actions of the illegal coup government was to halt the Gamperaliya programme by a cabinet decision. We have now resumed the programme with renewed vigor.
Having stabilized the economy, I am confident that our twin programmes will support economic growth and consumption – which will in turn drive consumption growth and help all business activity as well. In parallel, our third priority is to continue reforms to enhance productivity and competitiveness. In fact in the latter part of 2018 we began to see results of our efforts as Sri Lanka moved up 11 places in the Doing Business index.
There is a lot more to be done but it is clear that we are on the right path. We will continue to build competitiveness by liberalizing the economy where we see excessive controls and costs. We are also investing heavily in training and skills development – we will work closely with the private sector in building the relevant skills. More on this will be revealed in the budget.
Let me end by assuring you that all of our policy initiatives build on the spirit of the title of this session – “crafting and implementing evidence based policies”. Gamperaliya for instance includes investments in irrigation to improve climate resistance and reduce vulnerability of the rural economy. It includes investments in rural roads and markets to improve connectivity and integration into value chains that can uplift sustained income generation.
At the same time, we are implementing a rules based economic framework that will create confidence in the sustainability of the policy outlook. The Inland Revenue Act for instance is an important piece of legislation that reduces individual discretion and builds in predictability. The same applies to a market based fuel pricing mechanism. We will explore similar practices in other areas that help instill certainty and predictability.
We will continue to consult with industry in policy implementation and provide the necessary time frames for industry to adjust to such measures. I assure you that these principles will inform our budget process this year and the years to come.
*Remarks made by Mangala Samaraweera, Minister of Finance and Media at the inaugural meeting of the AmCham Breakfast Buzz, organised by the American Chamber of Commerce, held today (21), at the Hilton, Colombo.