Interview with Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka ~ by Shakuntala Perera
Q: Yours was the unenviable task of carrying the economy through a global recession as well as an intensified war within the country. How did we push through without the breakdown that seemed inevitable at the time?
Very simply, by getting our basics right. To withstand any pressures you have to get your fundamentals right; we worked very hard on getting our inflation, interest rates, reserves and other key indices right. Without this we would’ve been in a very difficult position. So we didn’t feel the shock because it was absorbed by the govt in one way and by the Central Bank in another. We lessened the pressure on the economy by not letting it get transmitted to the economy. We took the market shock as far as the reserves were concerned; we didn’t allow the rupee to play too volatile. By which we ensured that stability was maintained. All this paid off.
Q: The government expressed much confidence in investor growth following the successful end of the war. How successful have you been in attracting the desired investment?
Most of these investments as well as economic factors get translated ultimately to see whether your growth is happening and if the stability is maintained. We see in Sri Lanka that growth is happening; we saw last year an 8 per cent growth in the economy- one that any Western country would give anything to achieve. And at the same time we maintained stability ensuring that the markets were not affected.
We did that by ensuring that the amount of investment was sufficient and that the investment got in to the right areas. Investments must come in to growth areas that can give you a return on that investment.
We’re also seeing our food security maintained, and the milk is on the way there and electricity coverage is very good. These are all good indicators. Of course maintaining this will be difficult given the turmoil in the global oil market.
The difference with the current shocks globally is that they come more regularly. Some of the ones I’m facing on a monthly basis are those that earlier Governors would experience in their lifetime! But now were also geared for that and confident that we can meet these challenges. We have brought in new buffers to help withstand these pressures, in the form of bringing in our reserves which are now higher- our tax space is now broader which means that we are able to generate more revenues to the government.
Q:But given the slow movements how confident are you of the rate of investment the country needs is taking place?
I’m happy with the investment coming in now, because anything more would also cause us problems; there is a certain quantum of investment that an economy can deal with at any given time. We re able to deliver an 8% growth with what we’re getting now- if there was more it may have improved our overall growth. But with a greater tendency for other pressures; like those of inflation or too much liquidity. In fact more money coming in can make the rupee appreciate faster.
These are the other sides of the coin the pressures of which we haven’t had to deal with particularly because the inflation levels have been at the right level. Someone may argue and say that we haven’t got enough- maybe, but initially in many countries which are going through a transition like ours the first investors would be the locals. We’re seeing it here too. After this takes shape you will see more foreign investors coming through- maybe in a year two. And in the mean time we’re seeing big investments like Shangri la coming through too. At the moment I’m not too uncomfortable with the investments that we’ve seen taking place.
Q:Are you concerned with the manner in which the Tamil Diasporas are affecting the investment coming in by their negative publicity?
Definitely, I would’ve been much happier if that didn’t take place. It is in the interest of all that Sri Lanka has a quick path to development. But by doing what they are doing they’re forcing the people here in further difficulty. If they have any real feeling for these people they would be like us and going there and instilling confidence to improve their lot. My message to them is; without grumbling come and invest and improve their conditions here. This is the best service they can do for them, unless they want to indirectly make them suffer further.
Q: But records show that the inflow of investments for the last two years are less than in the previous years, when the war was on – how is this possible ? Why is the BOI downgrading their targets and post conflict investment projections?
In a way that is an unusual occurrence. I believe in hindsight; there is a reason for that- immediately after the war was over there was an interim period when people wanted to see where the situation would take the country. They wanted to see if the peace would hold. Then came the elections- which both took up close to a year. But thereafter the flow started. I’m fairly confident that the interest will be maintained and that people will appreciate the political stability and the security maintained providing an impressive area for investment. These are the factors that will impact upon the big investors- the ones who are slow in coming in but once they do help start moving things fast.
Q: There are allegations that the economic development that is taking place is limited to a few infrastructure projects carried out with foreign loans, thereby resulting in adding to foreign debt but not contributing much to the economy.
It is essential that we have the capacity to develop if we don’t have the money. Otherwise even if we have growth, it’ll be at a slow phase. You need to take the chance as there is always a risk, because if you borrow too much and our capacity to repay is not sufficient we can get in to trouble. In 2002 our debt to GDP ratio was as high as 103% - last year it had come down to 84%. Actually debt may have increased but it is still manageable; what is important is that repayment is long term. So with these 30, 40 year loans we’re very much on track- we’re not in a debt trap at all- we have every confidence we can repay our debt. Over the next five years we expect the ratio to come down to 60%- a very comfortable level as far as the world is concerned.
Q: But the international ratings giant Moodys’ rated us just over Lebanon and Jamaica in our debt affordability.
That has been a worry for us. In fact I visited Brussels two weeks back and had the occasion of meeting the OECD to explain to them of the change that has taken place. Many of them do a rating and do not revisit them often enough. Perhaps there is a responsibility on our part also to engage them and explain to them what has happened. Moody’s, Fitch have all upgraded us eventually and in a period when many other countries were down graded. We were one of the few that saw an upturn in rating. Again, there is plenty for us to do but we are doing what is necessary and the country’s rating has improved.
Q:There are various pressures put on the country through allegations of war crimes and human rights abuses which can have a serious impact on the economy. How seriously affected are your functions by these allegations?
Economics and politics go together and to get a good economic environment you need a good political background. So in that sense we have a responsibility to tell our story out to the world, because there is an enormous amount of money being spent and immense efforts being made by international groups fed by both local and other international groups. Their main mission seems to be to damage the image of the country and attack the economy. We’ve had to tackle this at an international level at regular intervals.
On every bond issue I handle I’ve had to confront this problem- we have convinced them of course which is why we had over subscribed many times over. This shows that those who’re putting their money in now that they are putting money in a good thing. When these people spread these rumors others need to check for the credibility of these claims. They speak of 30,000 killings at the end of the war- where are the bodies? Would I be able to walk as safely as I do in Jaffna if the security forces had carried out these acts? I believe the world will understand the true picture behind these lies.
Q: You always had your misgivings about obtaining the GSP+ facility. How are we doing without it?
We should never rely on concessions which are not trade related. These unilateral gifts given by the largess of their hearts are never to be trusted. These will only make us more dependable. The more we accept them the more beholden we will be to these organizations. All this facility does is, give the buyer an advantage- nothing to us. I could never see the merit in this. In the end we have seen that there was no real impact by losing it either
Q: It is commonly believed that there is a lot of liquidity in the money market – how can this be sustained over the long term without developing a bubble?
That is a concern- because there is a lot of liquidity and inflows of money that have come in had to be sterilized by the CB and we buy the dollars because we don’t want the rupee to appreciate too much. That’s a price we pay in this balancing act. That’s the price of stability. We have mopped up the excess liquidity. If we don’t do that there would be an increase in inflation which would affect the economy.
Q: Looking forward, how would the economy concentrate on for a sustainable growth in the next decade? How is our present income mix expected to shift?
We’re confident with the fact that we have been able to double our per capita income. We managed this in 5 years and we target it to double again in 5 years- so that we’ll reach a Rs.4000 per capita then. That shows that if we can go on that path we can transform this country. Of course when your doing that global pressures will increase. Were hoping the impacts will be less and that certain adverse impacts will be minimized
Q: Will there be many changes in our present systems and fiscal organizations, like the Dept. Of Inland revenue, Customs, BOI, and Treasury? If so, how will these organizations be seamlessly integrated to the benefit of the country and its economy?
We have introduced a very significant change at the last budget- a major initiative where the tax rates were brought down significantly, and the tax slabs broadened. Inputs many were reluctant to carry out. It was a bold call- we would reduce taxes and recover more revenues. Reduction of duties of vehicles did the same- although rates were halved those that were collected more than doubled in some areas. These steps will bear fruit- maybe the first year will be slow but recent numbers indicators show an improvement. ~ courtesy: The Daily Mirror ~