2017 Sri Lankan Economy Takes-Off
Sri Lanka is on a progressive path where fiscal consolidation, financial discipline and coherent consistent implementation are the key pillars of the 2017 Budget. The Sri Lankan economy is opening up providing greater access to markets and opportunities for the country to develop. Public Private Partnerships have been identified as the operating model to ensure transparency and as well as the best possible solution for greater growth in the economy. Ravi Karunanayake, Finance Minister of Sri Lanka is on a determined path to ensure that the visions of President Maithripala Sirisena and Prime Minister Ranil Wickremensighe become a reality and the Government delivers on the promises made. Thus enabling the much anticipated take-off of the Sri Lankan economy.
By Udeshi Amarasinghe
Photography Mahesh Bandara and Menaka Aravinda
The Budget of 2017 focuses on accelerating growth with social inclusion, can you elaborate on this?
The Budget was based on the President and Prime Minister's vision for the country. Since the Government consists of the two major political parties of the country it is an inclusive Budget that has merged everyones ideas into one national plan. The President's main focus was on the eradication of poverty in the year 2017 and the Prime Minister stressed on social inclusion. Therefore, we based the Budget on these two primary aims. We also focused on three specific areas; fiscal consolidation, financial discipline and most importantly coherent consistent implementation.
I truly appreciate the roles that have been played by both parties in order to ensure that we present a united Budget to the people.
Can you elaborate on how poverty eradication will be achieved?
In my opinion Sri Lanka has not seriously worked towards eradicating poverty, we have instead been perpetuating poverty. That is the way this country has been heading. We are tackling this issue head on because we do not want our politics to be based on keeping people in poverty. We want a modernised society, where people are engaged in economic activities instead of depending on social welfare. There is substantial employment creation taking place, which is a major area that we are focusing on.
I very much appreciate the roles that have been played by both parties in order to ensure that we present a united Budget to the people.
There are certain afflicted groups such as women, however they are playing a much more proactive role today. We have allocated a certain lending portfolio from banks for women engaged in SMEs. We have taken away the religious, caste and racial barriers and introduced a Sri Lankan identity oriented system. This is a gigantic step forward, and I look forward to everyone participating in this holistic growth.
What about generating employment?
This country has almost 8.2 million in the workforce, from that 91 per cent is employed in the private sector. However, this is at a sub-optimised mode, that is the reason we have emphasised on job creation. The Prime Minister has stated that we need to create one million jobs within these five years. This will be done in phases. We will bring in investment that will fulfil that requirement. Whether it is self employment or businesses creating jobs and employing staff, it does not matter as it is people participating in the economy. Therefore, in this Budget we basically look at selecting 50 people from each village where we are looking at bringing in 300,000 people into the job market through self employment. We have introduced low interest rates in specific areas and given them room to maneuver in order to get the economy moving.
There has been an alarming drop in exports in relation to GDP. What was 23 per cent in 2004 has reduced to almost 14 per cent in 2015. Therefore, we encourage businesses to take a pro-export growth approach. We believe that ‘export or perish' should be our motto in fighting the external world and ensure that we become a competitive production destination.
The next important area is market access. Many think that Sri Lanka's critical market is only our 22 million population. However, we have expanded our market by entering free trade agreements with India, and we are also in discussions with Pakistan, Singapore, China, Japan and Korea. Such agreements will basically enlarge the scope of any investor coming into Sri Lanka where they can commit their funds without any fear and have access into markets with the countries that Sri Lanka has signed FTAs. In this manner we are looking at almost one third of the world population. Such a platform is not seen anywhere in this region. This is the unique selling proposition that we want to utilise for a better tomorrow. I look forward to investors seizing this opportunity.
People should not protest or oppose such initiatives without understanding the benefits that they will bring to the country. This Government has the political courage and conviction to ensure that we take the country where it belongs.
Can you elaborate on how this Budget will be addressing the three core areas?
We first looked at fiscal consolidation; in the past we had been borrowing recklessly against the GDP, it was as much as 7.1 per cent, which is well over the affordable limit. The target was set by the Prime Minister at 3.5 per cent against GDP by 2020. This is to be achieved in stages. The IMF stepped in and tried to give us some ideas and certainly while listening to their advice we thought that we can do better than what they have said. For example, this year the Budget deficit was set at 5.7 per cent, however we are now looking at 5.5-5.6 per cent. We have projected that next year it should be 4.6 per cent.
There are certain sections that say that we are being dictated by the IMF and the World Bank but let me categorically say that if anyone gives us a good idea we will carry it out. That shows the good will of our Government.
This Government has the political courage and conviction to ensure that we take the country to where it belongs.
I would like to very humbly say that we have a fantastic team in the Treasury. Together with my colleagues in the Cabinet and with the support of the President and Prime Minister we have been able to introduce policies for the betterment of the country.
Secondly we looked at increasing the fiscal space by generating revenue and reducing costs while prioritising spending in selected areas. All capital expenditure has to go through national planning and a cost benefit analysis is done to ensure a good return. The major problem that we inherited was investments made on low returns. There were instances where eight per cent interest was taken on one side, and the earnings were a half a per cent. The remaining 7.5 per cent gap was paid by, for example the Colombo Port on behalf of the Hambantota Port.
Thirdly, ensuring consistency and coherency. The general perception is that with each Budget, policies change, therefore people are reluctant to invest their money. They need to have a sense of comfort when investing their money for an extended period of time. We wanted to emphasise and reassure them that this is the way forward. We believe in a low tax regime, higher tax compliance and thereby ensuring a bigger tax base.
Sri Lanka is focusing on export oriented growth therefore in terms of investments, incentives have been provided, can you elaborate on this?
We are not providing tax holidays, but investment relief. We tell investors that they should first bring their money and then we will give them tax relief on the bottom line. This is the difference that we basically looked at. Sri Lankan manufacturers and foreign investors who are already here are the best ambassadors so let us give them the opportunity first. Then we look at the second segment of businesses that are localised with foreign technical know-how and if not FDIs.
I believe that we should walk away from aid. Let us increase our trade, and forget aid. That should be our aim.
Tax changes are always where the people feel it the most, can you elaborate on the adjustments done in this Budget and also the thinking behind the changes?
Well, we have not increased taxes. We have ensured that the people who have not been paying taxes are being brought into the net. It is indeed shocking to hear that there is only one person in this country who pays 100 million rupees and above in taxation. When you see the luxurious houses and plush cars that roam around you expect to see a much bigger base of tax payers. If you look at the real tax payers in the country, they amount to only nine percent; we have 21,000 VAT files, 30,000 NBT files, 48,000 corporate files and 400,000 PAYE files. That is the total exposition for 22 million people. That is hardly sufficient when you want to take the country to an advance stage. We compare ourselves with Singapore and Malaysia. But if you take these countries from the time a person lands till the time they leave they are paying taxes everywhere. While at first they may do so grudgingly since they know it is for development they will pay their taxes on a timely basis. But in Sri Lanka, from the womb to the tomb we give everything for nothing; education, health, subsidised fertilizer, housing, and then when you cannot get a job you are given a dole. This is all paid for by nine percent of the tax payers. Therefore, we want to ensure that there is tax compliance in order to increase our tax base. We are aspiring to a particular height, let us also perspire to reach that height; ‘you have one per cent inspiration and 99 per cent perspiration'. This is an area where we are basically getting our act together in order to take the country to a different level.
How does the Government propose to increase the tax net?
Lower taxes and higher compliance. We have been very rigid but we have opened ourselves where ‘you pay or you pay for it'. That is our approach. We want to have a very friendly system; I must say that if anyone faces any harassment please do come back to us because that is not our intention. We will make the tax system a faceless exercise where you pay your taxes just like in the advance world.
The Prime Minister has always emphasised that basic policy has to be in place so that the country will develop. Can you tell how this Budget contributes towards this?
The Prime Minister as you know is a visionary and he spells out how things should be. As such there should be certain pedestals that should be laid in order to achieve that goal. The first area is fiscal consolidation, and then you basically say where you want to take the country and what is the method in which we are going achieve that aim. We looked at certain thrust industries such as the service industry, tourism, education, health and the financial city. That is basically four per cent of the GDP. We looked at agriculture, which is the main livelihood of most of the people. We are stressing that instead of sustainable farming while it should be commercialised. We want the sector to use high technology and we are giving them incentives to implement such advancements. When we say agriculture it does not mean only paddy cultivation, this also means vegetables, fruits and flowers. We have to make an industrial revolution in the agriculture sector. In the industrial sector we are moving in with drastic measures to reduce the input cost and make it a more competitive environment. That is how we are basically taking it forward.
I believe that we should walk away from aid. Let us increase our trade, and forget aid. That should be our aim.
The banking sector has been instructed not to lend to those that they want to but to the sectors that the Government has prioritised. We do not want to hear that they have provided loan facilities to just one per cent we want to hear that they have released loans to ten per cent of the businesses, which include five per cent to women and five per cent to the small and medium enterprises. We want the youth to become part of the system. It is a tough process to get this message across.
The Prime Minister's intentions have been routed through the Budget in every single sphere of activity while giving poverty eradication and social inclusion the pride of place in the entire process. We appreciate everyone who has come forward and have understood the genuine intention of the Government.
We see that the Government has a more focused and clear economic and development policy, what can you tell us about this?
While re-emphasising on the question on where the country needs to go, we have only laid the foundation and have a firm focus on where we want to take the economy to. Our policies are basically mandated by that and we are getting our bureaucracy in place. We are also calling upon the private sector to form Public Private Partnerships (PPPs) to achieve our goals, because the Government on its own will not be able to do that. PPPs have a sense of transparency and ensures fair play thereby taking the economy to other areas as well. The Government's job should be regulating and earning from the regulation process. As the regulator during certain detrimental situations the Government will step in and protect businesses. Spelling the way forward is one of our main targets.
This Budget has further tightened the budget deficit target to three per cent by 2020 can you elaborate on this?
When we inherited this economy the budget deficit was 7.2 per cent, which is unaffordable. Therefore, we looked at reaching 3.5 per cent but we are aiming beyond that to show that we can get three per cent. It is a very significant variation. We have to increase revenue to bridge that gap. The gap is going to be reduced not by increased taxes but through increased compliance.
I must confess that it is with much reluctance that we introduced the 15 per cent VAT. It was a heart burn to us; it is not something that we brought in with relish. It is because we have to recover revenue to pay the past loans that had been used for unfeasible projects with political dimensions by the previous regime.
I must confess that it is with much reluctance that we introduced the 15 per cent VAT. It was heart burn to us.
There is much international attention on Sri Lanka. The fact that the President and Prime Minister from two different parties are working together, is a reason alone for countries to invest in Sri Lanka. But there are no new loans coming into pay past loans or pay past debts that are there. That is why we have to create our own revenue through taxation and introduce an additional four per cent in VAT. I do not want to politicize this but I have to say this once. When we took over in 2015 we inherited a debt of almost 9.9 trillion rupees. When the economy was handed over to the previous Government in 2005 the debt was at 1,784 billion rupees. That is a five-fold increase without a resultant increase in assets.For example, SriLankan Airlines is a case in point; the airline had a positive reserve of 9,900 million rupees at the time the previous Government repossessed it from Emirates. But today they are at a loss of 147 billion rupees due to ill-run management and politicisation. Why should the tax payers pay 147 billion rupees? This is only the direct loss, the associated liability is another 150 billion rupees. For the construction of Hambantota Port we spent 197 billion rupees and we received a revenue of a value addition of only 300 million rupees. We had to find a solution and that is why we have invited the private sector to come in. 1.4 billion dollars (197 billion rupees) had been spent on the Hambantota Port. We have been able to convert this debt into equity thereby making it a FDI in the form of a Public Private Partnership. The Ports Authority is the partner in this instance. Likewise, the Mattala airport, is an airport that is ready to have A380s coming in. We have spent 27 billion rupees on it. What we have done is given equity to the debt that is there. There are many such examples.
While we inherited this massive debt, the President, the Prime Minister and I have also vouched that no one else will take over such a mess. It will be rectified, improved, never to look back.
These are the areas that come into cost. People ask us why the debt is high, there is a five-fold increase in debt that we are forced to pay. The biggest problem now is not that it is a carry forward but it is brought forward.
While we inherited this massive debt, the President, the Prime Minister and I have also vouched that no one else will take over such a mess. It will be rectified, improved, never to look back. How are we going to do this? Through financial discipline. We are not looking at reducing corruption, but to totally eradicate corruption. You cannot have skeletons in your cupboard and challenge society. That is the sense of honesty that we want. The only way for us to move forward is to have a concerted, financial discipline-oriented approach.
Stable interest and exchange rates are key areas. How will these be maintained?
These are two tools that are used which behave in two different ways. It is not possible to strengthen the rupee and reduce interest rates. That is ideal in a fundamentally well driven economy. But the first test that we have is to keep the rupee under control. We are an import led country with 68 per cent. Our exports are not essential items that if the price reduces that there will be quantum increase in the volume of exports. We have to protect our currency to ensure that we have a strengthened rupee. The President and Prime Minister have given instructions to us as well as the Governor to ensure that it remains within certain limits.
Interest rates are a measure that indicate whether the monetary policy are well within the overall framework of the Government. With the fundamental change in fiscal consolidation there is less to borrow and more liquidity in the market. There is an artificial creation of liquidity, which is a problem. To give a complete answer I must say that there are certain elements working in a manner that is detrimental to the Government; the Central Bank is one such place, where officials that have been there from the time of the previous Government are resisting change. We have taken cognizant of this fact. Together with the Governor we are looking at consolidating and giving the necessary corrective action, while progress is being made it is a very slow process. There were instances where bad publicity was given, it was said that the dollar is under pressure. This is pure fabrication, and was done to show instability. However, Sri Lanka currently has the safest and stable environment even though it is the worst turbulent climate in the global economy.
Public Private Partnerships (PPPs) are the main operational model for the Government. Can you elaborate on how loss making ventures are being revitalized and any PPPs agreed upon at this stage?
We are looking at Public Private Partnerships so that we can give the best possible solution to the people. We have looked at non-strategic investments as the first point of testing whether this is workable. SriLankan Airlines is hot on the list. Then we are looking at the hotels. The Government does not need to manage hotels, the private sector can do that and the Government can collect the taxes. We are looking at Public Private Partnerships in agriculture and in the areas of oil refineries. Why should the Government spend 3-4 billion dollars, when the private sector can? With competition we will be able to get the best price. We are basically looking at ways in which instead of dumping billions and tying up limited capital we look at those who can achieve this without any cost.
We are looking at Public Private Partnerships so that we can give the best possible solution to the people. We have looked at non-strategic investments as the first point of testing whether this is workable.
Road construction is another area that we looked at; instead of having a 100 per cent foreign company coming in, we are encouraging local tie-ups on BOTs (Build-Own and Transfers) or Design-Build-Own and Transfers. It brings in the true spirit of the price reductions that are there. Today we can say with pride, that the present road construction costs are 23 per cent lower than what it was three years ago. Therefore, you can see that we are drastically reducing the cost. That is the way forward. We ensure that there is a sense of transparency and openness in everything that we do. We take pride that the World Bank has given due recognition to what we are doing. Sri Lanka has been considered as a role model; the World Bank has applauded our Natural Disaster Insurance Fund, where we are the litmus test for other countries to follow suit. We are also bringing in a legislative process so that people know that there is a sound, safe, secure method of doing business in the country.
The energy sector including power generation and renewable power is another area that we focusing on in terms of public private partnerships.
In terms of Hambantota we are looking at making this a vibrant industrial city. That is what we have invested upon. The Prime Minister saw it fit that we basically go and attract investments from other countries, and China plays a significant role in this endeavor. We are also looking at investments from India, Japan, Korea, the European Union, Singapore and Malaysia in a big way. We see the American influence as well through their regional partners in Sri Lanka. Sri Lanka has now opened up to the world, which was earlier closed. We have started that process.
What can you tell us about the Financial City?
The Financial City is something we spelt out in last year's Budget in order to attract attention to Sri Lanka. We are in a region that is a natural home to almost one third of the world population: India, Pakistan, Bangladesh, Afghanistan, Bhutan, Nepal and surrounding areas. We are close enough to countries like Indonesia which have a huge people base and we also looked at where surplus foreign exchange goes to. Singapore on one side; Dubai, Qatar on the other side. We thought that we should offer the same services with the respect and confidence to the people in the region. Sri Lanka has a strategic geographical location. We have a good track record in the service industry, and what we are saying is that let's give the opportunity to the people to have that confidence in us.
Then the port city that was started, we had to do certain amendments to it. And when this came out after successful negotiations we converted that into a Financial City, where you will be have financial transactions in that particular area. That is offshore banking and getting Sri Lanka onto a platform of digitalisation with modern trading terms.
The legislation will be processed in the next few weeks. We want to relieve exchange controls. We want to have these archaic and antique laws repealed, and introduce protective measures; we do not have a free-for-all for anyone. We have a foreign exchange management agency to look at any outlets, which are a detriment to the country.
Can you tell us about the proposals for the agriculture, industry and services sectors?
Agriculture, we see paddy as being self sustaining. In that sense we have our basic food needs in place. There are five items in which the President wants the country to be self-sufficient by 2018; that is potatoes, onion, maize, soya and chili. Instead of importing almost 85-90 billion rupees' worth of agricultural produce, we can increase domestic production and create economic activity, which trickles down to the people. The planation sector - tea, rubber, and coconut - is going through bad times. We basically need to incentivize and do re-planting and introduce high-yielding new varieties. We have to give the pride of place to agriculture, which employs almost 40 per cent of the job market. That is where we see the necessity. The country has to move away from the concept of farming which is not sustainable to commercial farming. That would be the significant change. We want to make businessmen out of the farmers. Those are the three areas that we are focusing on. We want to ensure that we walk the talk. We are giving funds to where it matters. We are giving almost interest free loans as well as duty free agricultural equipment. This is the way to take these sectors forward.
If we are going to increase the reserves in our country, we have got to add it in two ways. One is increasing our own reserve by value addition and the other is to bring FDIs and add onto the system. The way forward is value addition.
Value addition in industries in tea, gems and tourism are a political issue and at times the private sector themselves are a bottleneck. The most value added approach that we see is tourism. Then look at the plantations: tea, rubber, coconut; there are some who are genuinely doing value addition. Certain companies are doing well; but the majority are scheming it off and not getting into the system. It is the same in the gemming industry. If we are going to increase the reserves in our country, we have got to add it in two ways. One is increasing our own reserve by value addition and the other is to bring FDIs and add onto the system. The way forward is value addition. We have given all the incentives possible for value addition.
How are you going to discipline the banking system?
The banking system is over crowded. There is a need for banking consolidation. Now this cannot be mandated, it has to be voluntarily given the opportunity. We firstly increased the capital base and the share capital of the bank should be increased. We have stipulated 20 billion rupees for banks and for non banking institutions 7.5 billion rupees. The balance sheets need to be strong enough so that we can withstand the pressure that is there. Through that process banks have been given a license to do activities in Sri Lanka and we have given them the core areas of lending. Instead of concentrating on only across the board lending, for example consumption oriented, there is no point in giving a loan to spend for one year without having a resulted revenue coming into pay for that. We have stipulated that they can lend to certain sectors also.
We want the banks to be more human because they lend an umbrella when the sun is shining and when it is raining they withdraw it.
We want the banks to be more human because they lend an umbrella when the sun is shining and when it is raining they withdraw it. That is because they have all the punitive powers through legal action. We are telling them that if there is a problem they can take legal action but first they have to discuss and see whether they can find a solution for the borrower's problem. They must keep in mind that if there are no borrowers there would not be a need for a bank. 75 per cent of borrowers are from the small and medium sectors. The CRIB was one classic example. About 90 per cent of the lending in the areas of less that one million rupees were in the CRIB. A poor person takes a loan, and he is unable to pay it and he gets into the CRIB, he will never be able to come out of it alive. That is why we made the decision that anything less than 500,000 rupees will be taken out of the CRIB. We have given the opportunity to restart themselves. There can be crooks coming in the system and they will pay dearly for doing so. But we don't want 99 per cent to suffer because of one per cent that defray the system. The banks have got the message and I feel that working together is the way forward, rather than walking in different paths.
During the Budget formulation process you visited most of the rural areas. Can you tell us about this experience?
For the first time we had universities taking a bottom-up approach to say what they would like to see in their vicinity and the country. We walked around the villages to identify the requirements and we addressed those issues. We brought everything to together and formulated solutions by working together, the President and the SLFP; and the Prime Minister and the UNP. This was not a Budget created in air conditioned rooms in Colombo; it was done where it matters, where the economy trickles down to.
Our biggest negativity is that we work, and don't talk about it; others talk and don't work. That has been a significant and salient difference between us. I think we have to take political cognizance of this fact, rectify errors, and that we are projected in the correct direction.
As the Finance Minister you met with all the Secretaries of the Ministries and provided them with the guidelines on the Budget. This is the first time that such a process has taken place. Can you tell us about this?
For the first time we have taken confidence in the chief accounting officers. As you know the President and the Prime Minister sets policy, cabinet implements it, but the implementing tool is the secretaries and the bureaucracy. We found that there was a certain passive resistance coming from some, for fears sometimes unknown and sometime deliberate. We brought them together and told them that they are the chief accounting officers and that they have a responsibility to fulfil.
I also call upon the private sector, you have taken too far this ‘wait-and-see’ policy. I would say, stop being lethargic. Be the entrepreneurs that are trail blazing Sri Lanka into tomorrow.
We are starting from January 1 and we have 365 days; we have 3,300 billion rupees; of that 800 million rupees in capital expenditure has to be spent. Last time we used only 55 per cent of the capital expenditure. We told them to monitor and analyse every week and see how much work is completed. We will be creating a new review committee, called the Budget Review Implementation Council, which will have 11 members, looking across all ministries, and report to the President and the Prime Minister on the performance on a monthly basis through the cabinet where the necessary action will be taken.
We told the chief accounting officers that this is the opportunity for them to show their professional ability and work along to show that we have achieved the goals being set. It is the first time that this has been done. It is a very participatory approach, because there is no sense in working in isolation. We are focusing on working together to achieve the ultimate objective.
It is also the first time that these secretaries have received any form of recognition. We have assured them that they are working in a depoliticized environment. We have relaxed the bureaucratic system, which is the need of the hour. We have told them that if there is any problem to speak to us but to stall the work. We have given them the necessary motivational pride to do their job.
Message for 2017?
Firstly, I thank Business Today for being very professional, month on month, year on year, and presenting the true situation. I call upon the people of this country tostop doubting, be visionary, help the Government to achieve what we promised and take Sri Lanka to a place that we can go. If there is a will, there is a way. All you got to do is challenge the system and go forward. I call upon the younger generation and the professionals to take a collective approach. I believe Sri Lanka will be able to steer clear, go into an investment mode and able to have a much higher growth than what it was. I am optimistic on that basis and we are bound to ensure that we achieve these goals, to have a better tomorrow. I also call upon the private sector, you have taken too far this ‘wait-and-see' policy. I would say, stop being lethargic. Be the entrepreneurs that are trail blazing Sri Lanka into tomorrow. We have some wonderful and fantastic companies. We have that talent, we must ensure that we open the gates for such talent to flow into the world.
2017 will be a great year where the economy will move from a wait-and-see mode to full economic revival.