Cabraal runs a tight ship for economic growth
Posted on January 8th, 2011

H. L. D. Mahindapala

 If you want to test the current mood of the nation just dial the mobile phone of the Governor of the Central Bank, Nivard Cabraal. Before his voice comes on the line you will be regaled  by the rich, effusive voice of C. T. Fernando singing “Jathika Abi manay” “”…” the rousing patriotic song which can be rendered roughly as: “Imbued with pride of Hela nationalism/ Acclaiming the glory of our heroic forefathers / Honour, honour the Motherland / Won with great sacrifices/ Awake, awake, awake “¦”¦”¦”¦”

It is unlikely that any other head of any bank would send a similar patriotic message to his callers. But then Sri Lanka is the exception. The Governor is brimming with confidence and he has reason to be so. He has steered the ship of finance in tsunami weather and not only survived but come out on top. The Central Bank is the flagship of the economy and his navigating skills are vital to guide the ship across stormy seas.

His optimism is blazing like the sun rise glowing in rosy colours.  Listening to him it is possible to conclude that he is talking up the economy. But listening to the other competitors and the mangers of the global economy “”…” from our nearest competitor like Singapore to IMF “”…” who are keeping a sharp eye monitoring every move, will confirm that his optimism is not unwarranted. The Singaporean Prime Minister and Defence Minister of Singapore, Teo Chee Hean, recently rated Sri Lanka as the fastest growing economy next to China. The World Bank’s Managing Director, Nigerian Dr. Ngozi Okonjo-Iweala, who was in Sir Lanka last week, commended the fiscal discipline and the overall management of the economy with immediate prospects of growing at 7%. And the rising trajectory of the economy, breaking through the ceiling, can point to the positive trends in the economy more than all the talk from all quarters.

In overall terms it means that Sri Lanka is no longer a nation going cap-in-hand begging for alms. It means that that Sri Lankan population is rising above the poverty level and is heading towards a middle income. It means that the economy is managed well and, as every boutique keeper knows, nothing happens in any economy unless it is managed well. That is one of the key factors for growth and economic stability.

In political terms Cabraal’s performance has debunked the old myth that it is only the UNPers who can manage the economy and produce results. The task of President Mahinda Rajapakse’s regime was just not to manage the economy. Its task was to manage the economy in a time of war when resources were sucked dry by the inexhaustible demands of a war “”…” in fact, the longest running war in Asia. The balancing act to maintain a viable economy without letting the nation go down in economic ruin “”…” a common trend in war-torn economies “”…” was a remarkable feat. It can be, of course, argued that the miracle was not in winning “the unwinnable war” but in sustaining the economy at a pace that was needed to win the war. Of course, both went hand-in-hand. And the economic managers of the nation deserve all the plaudits for just not maintaining a viable economy but also for paving the path of reconstruction while the war was raging throughout its destructive phases.  

Both the winning of the war and the growth of the economy in the middle of the war can regarded as two magic wands waved successfully to restore order to chaos. Mark you, all this was achieved without cutting the basic social services provided by the state. A commendable feature of the war-time economy was also the resilience and the sacrifices made by the people who went along with the “Mahinda Chintanaya” to make sure that it would win. Attempts made by the political opponents to exploit their hardships failed miserably. Cabraal concedes that the sacrifices made by the people contributed immeasurably to the success of the economy.

He attributes the success of running the economy to two major forces: 1 the commitment and the leadership of President Rajapakse and 2.  the people who followed the leadership of the President all the way to Nanthikadal. It is the ability of the President to run a multi-pronged assault on all fronts “”…” from the military to the economy “”…” that was the key to the success, he argues.

One notable example is the role played by the Central Bank in managing the financial sector which tends to come crashing down the greasy pole and hit rock bottom from time to time. The collapse of the finance companies has been a major worry and in the West it is the failure of the private bankers and financiers that threw their economies into a free fall. In Sri Lanka the Central Bank has stepped in when major private sector crises hit the market and administered corrective measures to put the financial businesses on the right track. There is no doubt that the rescue operations launched by Cabraal have been a prime source for the market forces to regain its confidence. Immediate and constructive interventions by the Central Bank has steadied the economy without letting it collapse in one heap. Cabraal has proved that the public sector can perform better than the private sector when it comes to mid-course corrections.

One of his talents is his ability to unravel and articulate the complex issues coolly and calmly with clarity and in detail. He has the facts, figures and trends at his fingertips. He surveyed the economic scene with ease as he ran through key indicators.

The following Q & A session surveys some of the key trends in the economy:

 How solid are the fundamentals of the economy? Is the current optimism rather overrated?

 Economic fundamentals have improved substantially in the recent years. Highlights are high and broad based economic growth, low and stable inflation, low interest rates, robust balance of payment position, strong foreign reserves, stable exchange rate, declining unemployment rate and renewed investor confidence on the economy. The mega investment projects of the government such as roads, ports, airports, power plants etc. increase the potential high economic growth in the years ahead. On this background country’s sovereign ratings have been upgraded by international rating agencies while the International Monetary Fund has upgraded the country to middle income emerging market economy status.   

 2.  You point to the growing agricultural sector, the tourist sector, the overall economic growth rate, and the decreasing unemployment and inflation, strong foreign reserves etc. Can you give a breakdown in concrete figures to substantiate you confidence in the economy?

 Agriculture sector

  • Agriculture sector has shown a remarkable improvement in 2010 and this trend is expected to continue. Paddy sector has shown a significant growth with its increased extent under cultivation and production. The average yield of paddy has increased by 7.9 per cent to 87.6 bushels per acre in the yala season of 2010 compared to 81.21 bushels in 2009 yala. This increase in productivity is largely on account of improved extension services, fertilizer application and favorable market conditions.
  • Tea sector is also growing rapidly with its best ever market prices and the increasing domestic value addition. Tea export has recorded 16.90 percent growth in the first ten months of 2010 compared to 12.7 per cent negative growth in 2009. Tea production is expected to increase to 324 million kg in 2010.
  • Rubber sector also has performed well with substantial improvement in prices. Rubber export earnings have recorded an 81.2 percent growth in the first ten month of 2010 compared to 32.3 per cent negative growth in 2009. The rubber production is expected to increase up to 145 million kg in 2010.
  • Production of other food crops (OFC) also has shown encouraging prospects mainly with new lands coming under cultivation in the North and East alongside with introduction of high yielding varieties of plants and seeds.
  • The fishing industry is growing faster after the conflict. Fish production in 2010 has increased by 3 per cent to 375 million kg.
  • The dairy sector is also performing remarkably with conducive policies in place and domestic production has now reached above 30 per cent of total demand.

 Industrial sector

  • The industry sector of the economy registered a high growth of 8.3 per cent during the period January to September 2010 reflecting the revival of domestic demand as well as export demand. The factory industry subsector contributing about 55 per cent to the industry sector and more than 90 per cent to the manufacturing sub sector registered a growth of 7.1 per cent during this period. This high growth in factory industry was reflected in all major categories arising due to the increased demand from major trading partners’ economies with the gradual recovery of the global economy and the conducive domestic economic environment. 
  • Textile, wearing apparel and leather products category which is the second largest contributor to factory industry and the largest export oriented industry registered a moderate growth of 3.6 per cent during the period January to September 2010 compared to a negative growth of 0.5 per cent during the correspondent period in 2009.

 External sector

 Foreign Reserves

  • Foreign reserve which continued to improve since the second quarter of 2009, projected to reach USD 6.6 billion by end 2010. This was equivalent to 5.8 months of imports. With continuous foreign inflows, we expect foreign reserves to increase further and to be equivalent to 5-6 months of imports, over the medium term.

 Exports and Imports

  • Earnings from exports grew by 13.2 per cent to US dollars 6,505 million, year-on-year, during the first ten months of 2010. The largest contribution to the overall increase of exports during the first ten months of 2010 was from industrial exports, led by increased earnings from exports of rubber products, machinery and equipment.  Exports are expected to grow by 13.3 per cent by the end of 2010.
  • Exports are projected to grow by 13 per cent in 2011 with higher levels of value addition, further  diversification of export products and markets, higher economic activities expected from the Northern and Eastern provinces and the gradual recovery of the world economy. In addition, deeper regional economic integration through enhanced trade with the regional countries is expected to help enhance export performance. The improved macroeconomic environment, increased investor confidence, new investment opportunities created with the end to the conflict would provide the required impetus for such a high growth. 
  • Expenditure on imports grew by 34.1 per cent, year-on-year, to US dollars 10,970 million during   the first ten months of the year.  The largest contribution to the growth in imports emanated from imports of intermediate goods, led by higher petroleum imports. Import expenditure is expected to grow by 37.7 per cent by the end of 2010.
  • Meanwhile, imports are projected to grow by around 14.3 per cent in 2011, mainly due to the higher import demand arising from the higher level of domestic economic activities including the Northern and Eastern provinces, better performance in the tourism sector, and the development of major port and power generating projects around the country.

 Tourism

  • The number of tourist arrivals in 2011 is expected to exceed 700,000, with increased arrivals from the traditional markets of South Asia and Western Europe as well as from hitherto untapped markets such as East Asia and North America.  Sri Lanka is targeting 2.5 million arrivals and $2 billion in earnings by 2016.

 Unemployment

  • Annual Unemployment Rate declined continuously to record 5.2  per cent by the first half of 2010.

           Inflation

  • Inflation has remained mid- single digit levels during 2009 and 2010.  Year-on-year, inflation was 6.9 per cent in December 2010, compared to 4.8 per cent at end 2009, while annual average inflation reached 5.9 per cent, from 3.4 per cent at end 2009.  Prudent monetary policy measures of the Central Bank, improved fiscal conditions, favourable developments in the supply side supported to bring down inflation and maintain it at low and stable level.

 3. Is there a possibility of an Ireland or Greece occurring in Sri Lanka?

            No.

  • Problems in Greece and Ireland have arisen mainly due to high sovereign debt and high possibility of debt defaults. In Sri Lanka there is no such situation. We have been able to bring down the overall debt to GDP ratio to 86 per cent in 2009 from 105.6 per cent recorded in 2002. Sri Lanka has never defaulted its debt servicing and it has an unblemished debt servicing record. In the medium term the government expects to reduce its budget deficit to 5 per cent and debt to GDP ratio to 60 per cent.

 4.If by any chance a financial crisis of the magnitude that is sweeping Europe occurs how are we going to cope with it? What are the checks and balances put in place to manage it?

 

  • Banks as well as non-bank financial intuitions are supervised closely by the Central Bank of Sri Lanka and necessary prudential measures and guidelines are issued from time to time to strengthen the financial system. In the recent past, regulations, supervision and surveillance have been further strengthened by the Central Bank with specific measures to improve the governance, disclosures, etc.. Further, directions have been issued on credit risk management to avoid the credit risk management as well as foreign exchange risk management.  

5.  How big is the national debt? Is it manageable? Ranil Wickremesinghe is sounding alarmist notes saying that the debt burden is too much and he is asking who is going to pay this huge debt. 

  • Outstanding government debt as a percentage of GDP, has reduced from 105.6 per cent, the highest level recorded in 2002, to 86.2 per cent in 2009. Debt to GDP ratio in 2010 is likely to be about 84 per cent and projected to decline to around 60 per cent by 2015. 

6. Are you happy about the quantum of investments coming in? What are the areas picked by the investors and are these investments diverse enough to accelerate growth?  

  • The realized FDIs in 2010 were somewhat lower than the expected level. However, it has been noticed that FDIs globally has declined in 2009 and 2010 due to the impact of global economic crisis. Going forward, we will see an increasing level of investment coming to areas such as  telecommunications, manufacturing, power generation and tourism sectors. In the manufacturing sector, food, beverages and tobacco products; textile, wearing apparel and leather products; chemical, coal, rubber, petroleum and plastic products categories are the major areas. We expect public and private investment, both local and foreign to grow above 30 per cent of GDP in the medium term.
  • Further, it has been proposed in the budget 2011 to revise BOI Regulations to offer very focused incentives to priority sectors while attracting investments to fill vacant positions in all 12 Export Processing Zones. Concentration will be on promoting quality investments that add value to our economy while being environment friendly and socially responsible.

 

7. What are the positive factors that are there for Sri Lanka to win in the competitive market? For instance, the big powers like China, USA, and Russia etc are queuing up at the gates of India to gain entry. We can’t, of course, that kind of attraction being a small nation. But what are sources that can attract the investors? 

  • In attracting foreign investors, each country will have to develop its own competitive edge. A good example is that being small countries, Singapore and Hong Kong attracted huge amount of foreign investment targeting the export market before other bigger countries like China began to attract foreign investment.
  • The reasons that can be marketed to attract investors to Sri Lanka are;
    • Sri Lanka is strategically located on the East and West shipping route and serves as the point of entry to South Asia.
    • Strategic access to Indian Market – The Indo Lanka Free Trade Agreement clearly demonstrates the political goodwill and commitment between India and Sri Lanka. The agreement creates multiple investment opportunities for local and multinational firms based in Sri Lanka seeking to enter the Indian market. The underlying premise of the agreement is to create a free trade area through the complete or phased elimination of tariffs, which will occur over defined phases.
    • Sri Lanka is to emerge as a major Global Logistics Hub in the South Asian region for trade, investment, communications, and financial services.
    • Public/private partnerships opportunities in mega infrastructure projects- e.g. Colombo port expansion project
    • Greater opportunities in Tourism sector
    • Open Economy – Today, Sri Lanka is ranked as a well regulated and open economy in South Asia. Foreign ownership and involvement is welcome in almost all areas of the economy.
    • Highly literate easy to train labour force.
    • Attractive and transparent laws including bilateral protection of investments

 

8. There is a criticism that you are attracting only the lower end of investors and not the big manufacturing investors who can create wealth by adding value to raw materials? Is this the case?

 

  • The Board of Investments of Sri Lanka which is the main facilitating unit of FDIs has created a conducive investor environment in Export Processing Zones with special incentives for attracting both small and large scale foreign investors Factory industries such as food, beverages and tobacco products, textile wearing apparel and leather products, chemical, coal, rubber, petroleum and plastic products categories, with a substantial value addition to raw materials absorbed large amount of FDIs. Government having identified inadequate measures that have been in place in the past to facilitate a conducive investment climate has proposed to promote large investments under the strategic investment law and income tax laws in Budget 2011. It was also proposed to revise BOI Regulations to offer its incentives to carefully targeted strategic and priority sectors.

 

9. Are there significant changes in the behaviour pattern of the consumers in the market place? How    responsible are they in their fiscal management? Matara, for instance, is noted for borrowers to default? Are there any checks and balances to correct this behaviour pattern?

 

  • Over the time, expenditure pattern of people has changed and  living standard significantly improved. With the increased income of people, demand for consumer durables such as mobile phones, electronics, motor vehicles etc. has increased. The Central Bank closely monitors the credit pattern, non-performing loans (NPL) etc. and has witnessed that NPL rates are declining to pre-crisis levels. 

10.  How have the expatriate community responded to the needs of the Sri Lankan economy? A common complaint is that there is too much red tape hampering their efforts to invest, or even to offer goods and services voluntarily to help the needy? Should not the government take more actions to enable expatriate investors and volunteers to come and work in Sri Lanka?

 

  • Sri Lankan always welcomes expatriate investments and volunteer work that are beneficial or/not harmful to the country as a whole and are within the Sri Lankan law.  Recently the Central Bank of Sri Lanka relaxed foreign exchange regulations further, to encourage such investments. Therefore, there is no restrictions what so ever for such investment and government has invited them to come back to Sri Lanka and contribute for the betterment of the country.
  • Sri Lankan expatriates, especially the Tamil community are being encouraged to return to Sri Lanka after the end of the armed internal conflict and to invest in the development of the liberated provinces. Overseas Sri Lankans are also being encouraged to invest in the Colombo stock market as well as in Treasury Bills and Bonds as was witnessed in the past. Further,  specific measures are today underway to improve the ease of doing business in the country.  

11. Quite logically, the government has prioritized growth of the war-ravaged north and east. Is there a resistance to government investments in these two areas? And are you satisfied with the rate of growth in the north and east? 

  • Government has already launched two development programmes, Neganahira Navodaya  in the Eastern Province and Wadakkin Wasantham in the Northern Province to expedite reconstruction and rehabilitation activities in these two provinces. Accordingly, several infrastructure development projects in the areas of roads, bridges schools, health institutions, livelihood activities, irrigation are in progress and some have already been completed. In addition several mega infrastructure development projects have been commenced all over the country, including the North and East.

3 Responses to “Cabraal runs a tight ship for economic growth”

  1. Ben_silva Says:

    Another excellent article by HLD. The world and indeed Sri Lanka would be affected by population growth. In a day 200000 babies are born in the world. Population grown in India is high and uncontrolled. All thses factors would have in impact on society, energy needs, schools, transport, food global warming, floods, healthcare needs and so on. It is useful to think of the the impact society on population growth.

  2. gunarat Says:

    Dear HLDM:

    I know that you can do much better than the imbalanced adulation implicit in this news feature.

    Although objectivity is a grand myth in journalism, at least try to adhere to the advice that Buddha gave in the remarkable Kalama Sutta. Buddha said (I quote the Wikipedia):

    Do not go upon what has been acquired by repeated hearing,
    nor upon tradition,
    nor upon rumor,
    nor upon what is in a scripture,
    nor upon surmise,
    nor upon an axiom,
    nor upon specious reasoning,
    nor upon a bias towards a notion that has been pondered over,
    nor upon another’s seeming ability,
    nor upon the consideration, “The monk is our teacher.”
    Kalamas, when you yourselves know: “These things are good; these things are not blamable; these things are praised by the wise; undertaken and observed, these things lead to benefit and happiness,” enter on and abide in them.’

    I presume that your report is based on an e-mail interview with Cabraal. It did not appear to be an interview conducted in a direct face-to-face meeting. You don’t indicate that you cross-checked the responses for accuracy. How would the reader know whether Cabraal’s assertions are indisputable? Is there even a grain of truth in the opposition’s criticisms?

    You also appear to put down people with earned doctorates by claiming that MR has solved the country’s problems through the application of his local knowledge. True that the doctorate has lost its old luster because of the multitude of “degree factories” that have mushroomed worldwide. UNIVERSITIES have cheapened the doctorate by conferring honorary doctorates on influential people with no academic ability. A PhD indicates the ability to analyze problems within a specialized field systematically. It is not a measure of a person’s IQ or naive intelligence.

    I hope that you will construe this note as constructive criticism. I hope that your future political essays will follow the Middle Path or the yin-yang principle rather than one-sided adulation.

  3. NeelaMahaYoda Says:

    Sri Lanka was –World’’s Top Performing Stock Market in 2010
    Jan 12th 2011 – Hardman and Co today published a report on Sri Lanka entitled “Sri Lanka Was –World’’s Top Performing Stock Market In 2010”. In summary, the report says:

    Sri Lanka was the world’s top performing stock market in 2010, with an increase of 96%. In this study we examine the progress that the country is making now that the 30 year long insurgency is over. We find that economic growth is likely to continue at 8%. We examine the tax reductions, at corporate, investor and individual levels, that were introduced in the latest Budget. We believe that every strategist and investment manager with geographic allocation responsibilities needs to be aware of developments in this market. This research has been produced in association with Asia Securities of Colombo, and is the first of a series that we shall be producing on Sri Lanka.

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