Sri Lanka's Central Bank Chief faces Stephen Sackur on BBC's Hardtalk

BBC News

Governor of the Central Bank of Sri Lanka, Nivard Cabraal spoke with BBC's Stephen Sackur of Hard Talk.

Below is the full text of the interview aired on BBC's Hard Talk on April 16, 2008.
Stephen Sackur: Earlier this year the Sri Lankan Government formally withdrew from the long ignored ceasefire agreement with the Tamil Tigers. The Colombo government believes it can win a conclusive victory over the rebels and maintain Sri Lanka's economic growth. Ajith Cabraal is the governor of Sri Lanka's Central Bank. Is his country's economy strong enough to withstand the capital and diplomatic costs of the civil war?

Q: Nivard Cabraal, welcome to Hard Talk
A: Thank you.
Q: Now the ceasefire which was long ignored, finally came to an end in Sri Lanka at the beginning of this year. Is it the government's intention now to eradicate the Tamil Tigers?
A: Actually the government is looking at providing space for all Tamil moderate parties to also come in and take their proper place in the political spectrum. What has happened is, as long as the LTTE was strong.the LTTE was in a dominant position that they were in, it was impossible for any other Tamil group, a moderate Tamil voice to come in and make their voices heard. So it was essential that the terrorism had to be dealt with, if the other groups had to be given the space to make their voices heard.
Q: But my point is that there have been ceasefires in the past. There have been all out government offensives against the Tigers in the past and this civil war has not ended and gives no sign of ending, and you as the Governor of the Central Bank must find your heart sinks when ceasefires are abandoned and the war is back on in full force.
A: Yeah, we got to admit that it is always tougher to run an economy when there is some conflict going on rather than when its not there. But today the challenge is that many countries have had to face threats of terrorism in dealing with their own economies, and sometimes it is essential that we put it back and put it behind us, if we are to really move forward and that's the position we are taking too, because for people to come in and invest in Sri Lanka we have to ensure that we provide them with a safe environment.
Q: You can't do that, can you? You certainly can't put the war behind you, or put it on a shelf, and pretend it's not happening for a start. You have to spend two billion dollars or more a year funding the war.
A: Yeah. Well it's a little less than that. We spend something like 3.8 percent of our GDP on the war and on defence, and it is something similar to what lots of other countries also spend. For example, Singapore spends, 4.9 percent of their GDP.
Q: With respect, a country like Sri Lanka where 45 percent of the population live on less than two dollars a day, it makes no sense whatsoever from an economic point of view that you spend upwards of two billion dollars a year on defence!
A: Actually that figure may not be entirely correct.
Q: What, which one?
A: Yeah, the four point er.the 45 percent. Sri Lanka had a 22.7 percent below the poverty line in the year 2002. But last year the latest figures that have come out show that it has come down to 15.2 percent. So there has been an appreciable drop in poverty as well in Sri Lanka and that mind you, has been in the context of the amazing amount of difficulties we have been having, which shows that we have a resilience in our economy and it is what this entire thing is all about.
Q: But foreign investors are nervous, the ceasefire has collapsed, the war is on in full force. Foreign investors, for example, the Japanese Telecom giant NTT is pulling out of a major investment with your own Sri Lanka Telecom Company!
A: Yeah, but if you really see the Japanese investor has sold out at a profit to a Malaysian investor and Sri Lanka's foreign direct investment was the highest ever last year, at 751 million dollars it was the highest ever figure that we have ever recorded, and then when Sri Lanka went for a bond issue just in October last year, we went for a 500 million dollars and we had subscription for 1.6 billion dollars.
Q: Well of course you did. And you know why you did, because you were offering the most extraordinarily high interest rate. Over 8 and a quarter percent interest rate.
A: Yeah, true enough, but still for all that is about the level of interest any country which has a rating such as ours would be able to offer.
Q: Because your credit rating has sunk.
A: Yeah, but credit ratings...
Q: And the reason is, people look at Sri Lanka and they look at an economy in a war time situation that looks extraordinarily fragile. That's why you are burdening yourselves with these enormous interest rates to service your foreign debt because you find it difficult to establish your credit worthiness.
A: No, it is really not that simple. If you look at it overall, if you look at the macro economic numbers that Sri Lanka has been able to generate, our growth has been at nearly 7 percent for three years running, and that mind you, with this kind of environment that you are talking about. Our unemployment is the lowest ever at 5.4 percent. It's the same as that UK unemployment rate, our reserves have been the highest at its 3 " billion dollars. So you have seen, our exchange rate is stable now. There are many plus factors that are in the Sri Lanka economy that sometimes we have not being seeing in perspective, particularly because the conflict has been the item that has been the taking the front page.
Q: I take your point and it is your job as the Governor of the Central Bank to put a positive spin on Sri Lanka's economic performance, but one looks at the international agencies that rate, for example, your country's credit worthiness, and Fitch which is highly respected has downgraded your credit worthiness and one looks at the IMF report that focuses on inflation, that they say is well above 20 percent and is not the result of international commodity price inflation. For example, oil or other food stuffs, it is the result of in their words poor economic management at home.
A: Yeah, firstly that particular report is not the IMF report. It has been a staff report. IMF gives out what is known as an Article 4 surveillance report, and that report which the IMF takes responsibility for, does not contain any such number like what you just mentioned.
Q: So you are saying inflation doesn't run...
A: No. I'll explain to you exactly how it works, the report that you quoted from is a staff report which has been very poorly structured, and we have in fact made it known to the IMF that we do not agree with it at all.
Q: With great respect, I think our audience might struggle to see the difference between an IMF report which is a staff report, and an IMF report which is an official report - the fact is, the IMF people have been looking at your economy, they talk about poor domestic management, and they talk about an inflation rate which is dangerously high.
A: No, I'll just explain to you, because IMF report, the official IMF report - the UK also has an IMF report which is an Article 4 report, and that Article 4 report is a positive one as far as Sri Lanka's economy is concerned. We do have headline inflation which is high and we appreciate that if you say so and we also..
Q: You accept that it is over 20 percent
A: Yes, absolutely, but it is simply the cause that has been as a result of the very high commodity prices all over the world.
Q: The report we are arguing about specifically says that is not the case. One only has to look at neighboring countries, which have the same sort of problems with a higher oil price than you have where inflation is not running at over 20 percent.
A: But you will find that in many countries their inflation has risen by about 50 percent. You see, the way inflation is calculated is not the same all over the world. It is not a steady, standard method, but what we have seen in Sri Lanka, yes, our headline inflation has gone up but the core inflation - what you mean by core inflation is the increase in your prices without taking food as well as energy into account, the United States does it the same way, Philippines, Canada all those countries take the core inflation, which is without food and without energy. None of you take the core inflation of Sri Lanka which is the demand driven inflation which we have to be managing. That you will find in between 7-8 percent.
Q: Without wishing to get too technical, it seems to me that Sri Lankans, when they consider their lives today they are going to look at the fact that the price of rice, bread and oil has gone up between two and three times in little more than a year and they are going to say to themselves we are living in a war economy, we are spending more and more on this battle against the Tamil Tigers and our own living conditions are worsening.
A: Yeah, but that is also not really accurate, because if you look at the Sri Lankan per capita it is 1617 dollars up 50 percent over the last three years and mind you, these are the last three years that you have mentioned that were the tough years for us. So what it means is there have been huge economic turmoil right across the world. All the countries in the world are today grappling with inflation. The oil prices, what you missed, have gone up three and a half times over the last four years. That's a huge number, and we import every single drop of oil to Sri Lanka.
Q: You would accept therefore that given the way you say that your problems are really to do with the international economy. You would accept that Sri Lanka really cannot afford to be economically or indeed politically isolated in the coming months wouldn't you?
A: No, I don't think we are in anyway politically isolated. We have seen many countries investing in Sri Lanka. We have very good partnerships being done between Sri Lanka and so many other countries.
Q: Well let's talk about isolation - let me put to you a few examples. For example, the key allies and partners in Sri Lanka in the past few years, that is Japan, the United States, the EU, Norway; they have all condemned your government decision to formally renounce the ceasefire. They made great efforts to stop you doing that.
A: Yeah, you see finally Sri Lanka has to look at the overall situation from the Sri Lankan perspective as well. When you look at the fragility of the ceasefire agreement that you were just mentioning, the LTTE were never serious about it. It was always a contingent liability upon Sri Lanka to have this all the time at any moment. They were able to pull the rug under our feet, and then that was always having people not coming into Sri Lanka because they were all nervous because they did not know at what moment the LTTE could renege on that.
Q: Why did, if it's all about the Tigers, why did the government refuse to accept UN backed monitors to actually look at what was happening on the ground in the north and east of your country?
A: You see Sri Lanka has a very vibrant democracy. There are many newspapers. There are many international NGOs in fact you know we have as many as six...
Q: I'm talking about international monitors.
A: Yeah, I'll explain to you.
Q: People who can come in entirely independent from the outside under a UN mandate and actually report on what you know is a very very difficult situation in the north of your country with serious allegations of human rights abuses from your government.
A: Yeah, but you know we really don't need to have them coming in because there are so many other institutions.
Q: .but you do need to have them coming in, clearly you need them..hang on, when a British Minister Kim Howell from the British Foreign Office can say and I quote "The Tamil Tigers are not the only source of violence in Sri Lanka. Civilians in government controlled areas regularly fall victim to brutal attacks by para-military groups after acting with apparent impunity."
A: Of course, I have not seen that particular statement, but there are many, many more reports also that we have seen where many NGOs, many MPs have come in and have found that Sri Lanka has a very good record as well. So you see there are different sides to this story. It is a 25 year old conflict and naturally there would be certain tensions that would take place. But overall we have seen that in the difficult circumstances that Sri Lanka has managed well and that we have come out well in this whole exercise and there are many people who still have a lot of respect and regard for Sri Lanka.
Q: Well, I'm amazed that you as the Governor of the Central Bank cannot on the telephone talk to your own President Mr. Rajapakse and say to him "Sir, we have to do something about a major problem." We've got the Japanese for example, your biggest bilateral donor, they are saying they are reviewing all of the strategic aid to Sri Lanka okay, because they are concerned about human rights. The EU is considering whether or not to review a crucial trade deal. All because of deep unhappiness about your government's human rights record.
A: Yeah, if you just take those two. Japan - Japan has not in anyway pulled out at all and Japan has been very supportive of Sri Lanka.
Q: The Japanese Envoy Yasushi Akashi said in January he was, quote, gravely concerned, and the government's strategy in Sri Lanka was being constantly reviewed.
A: Yeah, but they have not pulled anything out, I mean we have very very good relationship with Japan and that is continuing.
The EU, you see personally I have been advising government from the point of view of the Central Bank, that it is time the government as well as the economic people who are involved in industry, do not rely only upon concessions to do their business. You see, we are today moving to a free market economy right across the world and it is important that Sri Lanka also recognises that they have to do business in the market place without concessions but if they do get concessions it is very welcome.
Q: Let me be clear about what you are saying because it's very important. You are suggesting to me that you don't care whether the EU reviews its special trade deal with Sri Lanka which allows you to export hundreds of millions of Euros worth of clothes to the EU every year?
A: Let met put it this way, you see sooner or later the EU will have to not give this concession because it is a special concession that they are giving - the GSP+, but there will come a time when Sri Lanka will have to stand on its own and export like any other country, because to the EU, there were many countries exporting. So the moment you have these additional concessions in order to buttress you to export your productivity is dropping. Your own methods will not be as stringent as you would like to see.
But you know Sri Lanka's apparel industry is a very mature one, we have very good standards. We commend ourselves saying that you know, we are an exporter of garments without guilt. So there are many good things going for the government industry.
Q: Of course a corollary to what you are saying, sorry to interrupt, but a corollary to what you are saying is that actually you would rather allow the army or the para-military groups a free reign to do what they will in the north free of any EU monitoring and observation.
A: I'm looking.
Q: Rather than keep the concessions on trade?
A: No. let me put it this way. I may not have made it very clear. We appreciate the concessions, that's fine. That's very true. But at the same time we as a nation, we as an industry in this particular area which is now becoming quite mature, we need to understand that we should not be only looking at concessions to look forward. But the government deals with the political spectrum and then sees how best they could get the additional concessions, that's fine but we are advising the industry not to rely upon specific concessions in order to do business.
That was never something that will work's like a subsidy. You know we don't really need subsidies to do certain things and the moment you rely on subsidies, the moment you rely on concessions, your own productivity falls and that's something that we don't want.
Q: It is interesting that the government, your government is very happy to take aid and concessions from another group of countries and I could list Iran, Burma, Pakistan where you have burgeoning trade relations and indeed aid relations as well. You seem to be shifting the focus of your friends in the world.
A: Actually, we don't, we.our position has been we have to trade with everyone. You see, no country would want to be isolated when doing their trade.
Q: You get rice as aid from Burma don't you?
A: No, no we pay for it, we pay for it, every single grain.
Q: That's not what is reported. It says you get a 100,000 tonnes of rice at knocked down prices.
A: Nobody would want to give.especially a country like Burma, will not be able to give rice at a concessionary rate and we don't really need to.
Q: I wonder whether Sri Lanka really wants to position itself in the world where its key trading partners become countries like Iran - which of course gives about 70 percent of your crude oil, but in return..
A: We pay for it.
Q: I know you do. In more ways than one because you have said quite openly, your government, that you fully support Iran's nuclear programme.
A: I don't know about the programme part of it.
Q: But that's the price you pay isn't it?
A: No, no we have been trading with Iran for the last 25 years, it was not something that happened recently.
Q: But I'm asking you.
A: We have been trading with Iran, we trade with the US, 33% of our garment exports go to the US, 29% of our garment exports go to the EU. 12% of our tea goes to the UK, so we have, so we trade with all the different countries and India today is one of our biggest trading partners.
Q: You have a long personal history in accounting, you've traveled and worked all over the world, does it make sense to you that Sri Lanka now is lining up with the countries I've just listed like Iran and Burma and losing support it seems in the countries of the EU, the United States and Japan? Does that make sense to you?
A: No actually, if you really think about it we have not lost from anyone.
Q: No. I don't want to nurse the argument again but I can give you lots of quotes which suggest there is real concern in the West about the way your government is behaving.
A: Not really, because when you really think about it Sri Lanka was at one time a tea, rubber coconut industry country. We used to export tea, rubber, coconut. Today we export many many items to many many countries. We import from many many countries so our trade basket has got so diversified that we work with so many different people and I think that's very important for Sri Lanka to ensure that we have a wide range of countries with whom we deal with.
Q: If I may be frank, is there a sense in which for your government, the war is useful because it takes the tension a way from some other endemic problems you have in your country not least corruption?
A: Actually, that would be rather unfair to say for no government would want to have a war with them. The worst thing that can happen to a country. This has been there for 25 years.
Q: But it takes the attention away from endemic corruption doesn't it?
A: This has been there for 25 years. It is a tough, difficult problem at the same time we got to deal with other major issues as well. We have had poverty which we have had for a long time. We are dealing with that. Our infrastructure development that we are going through now is one of the biggest ever infrastructure phases in our history.
Q: And you officially..forgive me.I want to stick to this issue of corruption, because I think it is important..
A: I'm coming to that...
Q: The Transparency International Directory in your country says corruption is rampant. It says cronyism and nepotism are the key problems. You need political patronage to get any position in this country. It says during the past three years this politicisation of office has become ever worse.
A: I think those are all rhetoric which people can say but at the end of the day..
Q: You are refuting that there is a cronyism and nepotism problem?
A: There..there may be instances. I appreciate and I do say there maybe certain instances where you may have projects going where there can be leakages but if you really think about it today our total number of projects Sri Lanka is handling is about 4 1/2 billion dollars. Hitherto the biggest phase of development we had in infrastructure development projects was about 1 " billion dollars and that was way back in 1977 or 1980. Today we are having two new ports being built. One new airport, three major highways, three new power plants, all of which are essential for Sri Lanka's growth in the future and those are important facets of development for the country.
Q: Indeed they are, but Mr. Cabraal is it not a problem for you when you turn your face to the international community and say money you provide in terms of investment will be clearly and efficiently spent in my country. Is it not a problem for you when your own position and your own behaviour has come under a cloud of allegations including calls for your resignation inside your own country.
A: You see people can say anything that they want but I have shown the world as to what I am. I have been selected by the US Government to be an Eisenhower Fellow. My peers have elected mentioned about accountancy..elected me to be the president of the Institute of Chartered Accountants. The most prestigious body, by unanimous vote. So my own credentials I think are very well known, but I think in Sri Lanka, the political spectrum is such that there can be political people who would want to discredit anyone and they do that and that's quite natural.
Q: There were allegations, to be specific that your family firm was involved, may be tandentionally, but was involved in another company which was involved in Pyramid selling which of course is illegal in Sri Lanka.
A: That's absolutely..
Q: You, when you got to the Central Bank, called off a Central Bank investigation into Pyramid selling?
A: That is absolutely.
Q: Why did you do that, briefly, why did you do that? Did you call off that investigation?
A: That is absolutely wrong, let me explain to you. That is absolutely wrong, it was firstly, it was not a family firm. It's a firm where I had 2% of the shares and if that is a family firm.
Q: Your wife is a director.
A: My wife is a director, was a director.
Q: So it is a family firm. You were chairman, weren't you? Before you divested you were chairman?
A: No, no. Let me minute.please allow me to tell you then you can tell me. My wife, the day I became the Governor of the Central Bank, she resigned, so that it was in the proper procedure and then after that the entirety of the investigations have been going on and during the last two years the efforts that I have put in in order to reduce the Pyramid schemes have been much much greater than it has ever been. So these are the political issues that people like to take out and we are quite used to it in Sri Lanka. You know we are quite used to that.
Q: We are running out of time. Do you think Sri Lanka, with the war going on, with corruption endemic, is in any position to really fight off a global slow down?
A: Look at our resilience with all these difficulties. We have been having a near 7 percent growth which any other country would have been proud to have. Our unemployment is at its lowest, our overall poverty levels have dropped to 15 percent which is very very manageable. Our debt to GDP ratios are also falling. In every aspect of economic life we have been doing better than what we have been doing in the past.
Q: Nivard Cabraal. We have to leave it there, but thank you very much for being on Hard Talk.

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