Govt. on right course, private sector must adapt and grow: Dr. P.B.

Maintaining that the Government was on the right course, Treasury Secretary Dr. P.B. Jayasundera yesterday urged the private sector to adapt as well as tap unprecedented growth potential, harnessing supportive policies and other measures.

Delivering the keynote at the first plenary session of the Ceylon Chamber of Commerce Sri Lanka Economic Summit, Dr. Jayasundera in a near-45-minute presentation detailed some of the recent socioeconomic and policy responses to cushion local and global shocks and how such measures have thus far been beneficial, as well as host of new opportunities for private sector in the area of import replacement industries, exports and services.
“These adjustments are not easy, neither politically nor economically. However, they have produced significant positive results,” Jayasundera said, referring to changes in the exchange rate, interest, taxation and credit growth policies as well as other reforms.  
Among many examples of benefits cited was the supply of foreign exchange by the Central Bank to the market, which had dropped significantly to $ 50 million in June from $ 500-600 million per month prior to the adjustments.
“This has stabilised the country’s external reserves at around US$ 6 billion in spite of a continued higher out-payment on oil imports,” Treasury Chief said, adding that the flexible exchange rate has boosted inflows to the stock market as well.
He also said the conclusion of the IMF programme facility together with the succession plan currently in preparation would provide a buffer to manage the Balance of Payments risks over the medium term.

The final day of the Ceylon Chamber Summit at Cinnamon Grand is today.

Though moderation in credit growth and the associated high cost of finance is a cause for concern for growth prospects, considering the substantial benefits in terms of managing the demand and particularly the inflationary pressures, a modest sacrifice in terms of economic growth to around seven per cent from the earlier projected level of around eight per cent is viewed as a justifiable move, Jayasundera explained.
He also said that upward revision in taxes on select vehicles has reduced imports by 40% and the fuel price adjustments too have helped contain losses at CPC and CEB, though the recent drought could pose fresh challenges to these two institutions.
“The commitment of the Government to keep the Budget deficit at 6.2 per cent of GDP will be realised by greater concentration on revenue collections and expenditure commitment control on the Budget provisions,” he added, noting that high bank borrowings and increase in the deficit in the first four months were all part of the required adjustments to the new fiscal and monetary policy regime.
“The flexibility in the exchange rate has helped exports and import replacement industries, but will reduce trade, banking, leasing and finance and to some extent constructions as their import content is high. The drought and its impact on agriculture and power generation too will reduce the value addition from these sectors. The monetary policy strategies and supply side initiatives have targeted keeping inflation at single digit level, though in the next few months it is likely to be in the upper single digit level,” Dr. Jayasundera added.
The Finance Secretary said the medium-term priorities of the Government are to revert the economy to an 8% growth path with lower inflation of around 6%. “Towards this, it is vital that Government continues to consolidate fiscal adjustments toward five per cent of GDP as announced in the National Budgets and attain monetary growth of around 14% with viable external reserves as well as domestic credit targets,” he added.
Participants of the Economic Summit were told of the hard choices the Government had to make between various tradeoffs in macroeconomic management, having to control high credit growth and reduce trade and fiscal deficit whilst boosting public investment, etc.
“The Government does not believe in compromising public investment or scaling down on rural development or freezing recruitments to important services such as health, education and technical services. Equally, targeting monetary aggregates should not crowd out credit to SMEs or long-gestation private investments such as plantations. This Government does not agree with a conventional reform approach and I see rationale behind such concerns, having worked with different modules used in Sri Lanka over the last so many decades,” Jayasundera said.
“These balancing tasks require policy flexibility in implementation. So, the macroeconomic framework which we have adopted and did not have difficulty in working with it with the IMF and other development partners has room for higher growth with external stability, but also the flexibility to adapt to local realities,” he added.
“The surge in development in the post-conflict phase has also confronted with many challenges. The most significant among them and the most immediate-term concern is the adjustments with the widened trade deficits, which have increased to US$ 10 billion in 2011, almost equivalent to the value of exports of that year,” he said.
For the country and private sector, he said there are several challenges. One was the competition with competitors who are competitive. “This is why the Government and private sector must move rapidly with reform initiatives,” he said, referring to developing human skills.
“The private sector needs to adjust in this direction rather than seeking conventional labour market reforms to enact hiring and firing legislations, because they seem inappropriate and politically unfeasible,” he added.
“Government has also identified several areas which are already in the private sector but operate significantly below market potentials for higher private investments. For instance, despite three to four large international cement manufacturers operating in Sri Lanka, 52 per cent of the domestic market cement requirement is imported. Similarly, 60 per cent of the steel requirement is imported despite the steel industry being in the hands of the private sector. Sugar and dairy have large domestic market potential of generating over a billion dollar saving over the medium term in the balance of payments,” Jayasundera said, adding that various incentives have already been given to tap this potential.
For exports, he said the future was for serving emerging markets and diversifying products with greater value addition.
“While many imports such as pharmaceuticals, sugar, dairy and essential food commodities could promote Sri Lanka beyond domestic market demand through increased private investments in those areas in which the progress achieved so far is encouraging, Sri Lanka’s exports such as fashion garments, leather, high value rubber products, value added tea and spices, gem and jewellery, IT and enabling processing services, quality water and food, etc., could be expanded to emerging markets significantly,” Jayasundera said.
“Sri Lanka has got a good blend of an inclusive growth strategy to address its future prospects,” Jayasundera said.
“The underlying global and local market potentials underscore investment prospects in export promotion and import replacement activities. Political leadership and the commitment of the Government to transform Sri Lanka to a middle income country provide new opportunity to all of us,” Jayasundera told the Economic Summit.
The second day of the Sri Lanka Economic Summit 2012 brought to the forefront several key issues facing the country, forcing both the public and private sectors to take a far closer look at many sectors and through much critical and sometimes controversial analysis.
“It strikes me that Sri Lankan policies are kind of cockeyed,” stated Lee Kuan Yew School of Public Policy Association Professor Dr. Razeen Sally frankly. “Sri Lanka should build up good relations with the West and India rather than starting with China. Some commentators talked about Sri Lanka’s weak and stagnating trade and FDI performance and this has a lot to do with Government policy going in the wrong direction under this Government.”
He further called the Government’s strategy towards imports and exports “economic nonsense,” noting that the heavy taxation on imports would inevitably have an adverse effect on exports.
“The climate for investment has arguably got worse rather than better. What will work is some liberalisation. Sri Lanka has too little economic freedom. Sri Lanka seems to be trending back to its wartime rate of growth,” were some of the other sentiments he expressed. “If these are Sri Lanka’s prospects, I see that while a handful of companies will continue to be world class in a few narrow industries, the vast potential that is out there will continue to be unexploited.”
Discussing the sudden push for entering emerging markets, Brandix Lanka Chairman Ashroff Omar dismissed the trend in terms of the apparel sector and several other industries. “I would rather focus on the EU, US and Japan in terms of apparel. My advice is that it’s a waste of time to focus on emerging markets where apparel is concerned. Even in plastics, the biggest markets again are the West. All the emerging markets are our competitors.”
Speaking on the topic of nation branding, Brand Finance CEO/Founder David Haigh criticised Sri Lanka for ‘brand clutter’ in terms of Ceylon versus Sri Lanka and called for more effort to be put into nation branding. “You need a corporate marketing policy – look at macro issues and engage with stakeholders,” he added.
On the reconciliation and rehabilitation front, International Centre for Political Violence and Terrorism Research Head Dr. Rohan Guneratne called for the building of an economic bridge between the north and south.
“The economic bridge between the north and south has not been created yet and this needs to be done urgently. The Government faces many challenges in the area of political stability. The TNA is still a sectarian party. It is important to groom a new set of young Tamil leaders and I believe that this is one of biggest challenges that the country faces.”