Sri Lanka’s economy looks forward to grow
Development has been going on the fastest ever in the
Central Bank Governor Ajith Nivard
Cabraal speaks to Daily News Business on the economic development that
country has gained during the past four years.
Q: Governor, what could you say about the economic
development that country has gained during the past four years?
A: There has been a tremendous economic
growth during the past four years in the country. When you say an
economic growth there are some economic indicators such as per capita
income, inflation, employment, poverty, reserves and infrastructure
Central Bank Governor
Ajith Nivard Cabraal
It took Sri Lanka 55 years to reach a per capita income of US$ 1,000
and during the last four years the Central Bank doubled it, which
indicates a clear progress while increasing the country’s GDP by 100
percent. Sri Lanka recorded a remarkable growth during the past four
years, while maintaining a continuous growth.
The growth was better every year comparatively to the corresponding
Inflation differed with an average of about 11 percent for the past
30 years and with that liberation of the country the inflation dropped
to three percent recording a single digit after over 25 years.
Our reserves, which recorded a maximum of US$ 2.5 billion earlier has
grown at present more than US$ 5 billion signifying the excellent
response from foreign investors, soon after the establishment of peace.
The debt market, treasury bills and treasury bond markets have responded
The unemployment rate, which was around 8 to 9 percent few years ago
has dropped to six percent and the country’s infrastructure development
has been going on the fastest ever in the history.
All major projects were launched while the conflict raged such as
five harbours, one international airport, 14 domestic airports,
Moragahakanda major irrigation project, two major power plants, expand
in road network, village tank developments and expansion of electricity
In 2005 electricity coverage which was 75 percent and today it has
covered up to 87 percent and the idea of the Government is to make it
100 percent in next two years. Poverty, which was 22 percent has come
down to 15 percent last year.
Kerawalapitiya power plant
This year, we hope to reduce the poverty to 10 percent and we intend
to make it to two percent by the end of 2016.
In every aspect there has been tremendous scope particularly with the
end of war. What is significant was that even during the war development
took place rapidly in every nook and corner of the country.
The path was cleared a progressive economy while fighting the war and
today we have come to a very important stage in our history where all
the negatives have been removed. As a result recently the New York Times
had said that Sri Lanka is the best place to visit in 2010, Wall Street
Journal had said that Sri Lanka will be one of the top ten countries for
growth this year and the IMF has said that we are no longer a poor
country, that we are a middle income state.
The outlook of the country has been changed over the past four years
to a positive image and that is one of the reasons for the rest of the
world to rate the country in this manner.
Q: Does the country highly depend on foreign funds
A: If we want to develop rapidly we have
to borrow and use that money now to develop the infrastructure and out
of the money that we gain we pay off. What is important is to see that
your income is sufficient to pay the loan. For a country the assessment
is debt to GDP ratio as against how much is your debt. In 2002 the debt
was more than the GDP, which was 104 percent when the GDP was 100
percent, but today the debt is 84 percent and the GDP is 100 percent.
It has been growing so that we are managing it much better than
before and that is one of the reasons that the IMF has rated us as a
middle-income country. We have a sustainable and a manageable debt. We
are borrowing to develop.
The previous Government borrowed money not to build bridges or to
build power plants, but to import wheat flour and for consumption. We
have more than US$ 500 million of loans that we are paying now for the
bread that we ate in the past.
Q: The opposition is complaining that the Central
Bank is injecting money to the economy without a control on its supply
and demand. What is your view?
A: We have to inject a certain amount of
money because otherwise the economy cannot move, but we do it
scientifically. We inject only what is needed for the economy to
progress and that is done with great responsibility, which the Central
Bank is entrusted to do.
We do it in an orderly manner and that is one of the reasons that we
have been able to bring down inflation and ensure economic stability,
when the whole world was going through difficulties. None of the banks
in Sri Lanka collapsed and we are proud to say that it was because we
managed it well.
Opposition has risen certain allegations on some infrastructure
projects such as Kerawalapitiya power plant, Uma Oya project and the
Q: What was the actual cost of the Kerawalapitiya
A:The cost of the Kerawalapitiya Power
Plant was originally estimated in 2002 as US$ 390 million. However, due
to careful planning and execution, the cost of the project is now
estimated to be only about US$ 295 million for the power plant of 300
megawatts when fully completed. That works out to roughly about a
million US$ per megawatt.
is satisfactory as it is close to the current industry norm of about US$
one million per megawatt for petroleum based thermal power plants. The
Kerawalapitiya plant is a combined power cycle plant.
The first 200 megawatts is generated with furnace oil. The exhaust
from the first phase is to be converted into steam to generate another
100 megawatts. The first phase is already in operation and the second
phase will be operational soon, in a matter of a few days. The cost of
setting up this plant will thus be distributed over the entire 300
Q: Did the estimated cost of Uma Oya project
A: The structure of a project can change
from time to time based on the project components. There may be add-ons
by the time a project is finalized, and it may even have certain
components that are dropped by that time. The original project had an
irrigation as well as power generation component and the estimate of the
project amounted to US$265 million based on input prices in 1999.
The Uma Oya project at that time, was meant to produce 50 megawatts
of hydropower and irrigate around 5000 acres of paddy land. Later, the
project scope was expanded and the hydropower generation capacity was
increased to 120 megawatts and the irrigation scope to 12,500 acres of
paddy. As a result of such add-ons, the project cost has been
re-estimated at US$545 million in 2009 prices.
It is generally estimated that the capital cost to produce one
megawatt of hydroelectricity is about US$ three million. In fact, for
the Upper Kotmale project, which aims to produce 150 megawatts, the
project cost is US$460 million. When all those factors are taken into
account, the increase in the project cost of the Uma Oya is reasonable
and there is ample justification for the increased project cost.
The Export Development Bank of Iran funds the financing for the Uma
Oya project. Usually, the agreement in such cases is that the contract
has to be handed over to a company from the country providing the
The general practice under the bilateral loan agreements is that
construction contracts are awarded to a contractor of the lending
country has been followed here too. However, having identified the
contractor, the Government has taken the necessary measures to ensure
the project is cost effective. In fact, the Government has been able to
negotiate and enter into the contract at a lower price than the
At the same time, any unexpected costs and adverse movement in prices
will also have to be borne by the contractor and no additional payments
need to be met by the Government.
Q: Did the feasibility study for the Weeravila
airport cost Rs 500 million?
A: That is completely untrue. According
to the information we have, the Airport and Aviation Services has spent
just Rs nine million million (not 500 million) for the initial work
relating to the Weerawila airport.
This includes the Environmental Impact Assessment (EIA) as well. In
any major project, an Environmental Impact Assessment has to be done.
Once the EIA was completed, and the location was found to be not
suitable, the project was shifted to Mattala. There is nothing unusual
in this. A location has to be studied to determine whether it is
suitable for such a project.
Q: Purchasing and selling of gold by the Central
Bank been highly criticized by the Opposition. As the Central Bank
Governor what is your opinion of this and how important is it for a
country to have gold as a reserve?
A: Earlier the opposition was shouting
that the Central Bank was bankrupt and we were selling gold. After that
they were upset when Central Bank purchased gold.
When there is a income you will buy gold and if not you will sell
gold. But Central Bank did not sell gold even at a crucial time, but we
bought gold to have certain anchor. Because of this even at a difficult
time we will have these gold as tangible assets backed with real value
and we believe purchasing gold is a correct decision.
Q: Military forces found a huge amount of gold,
which was belong to the LTTE. What has happened to it?
A: Any gold or any asset when it has to
be vested in the state there is a certain procedure to be followed.
Because policeman found a golden bangle or even gold captured by the
forces the Central Bank cannot easily take it since there is a legal
procedure and courts need to declare it. Even some accounts, which had
TRO funds have been seized with a court order. The gold been captured
during the JVP period had also been handed over by the courts and then
it was added to our reserves.
Q: What is the true story behind the hedging deal
of Ceylon Petroleum Corporation?
A: In this hedging deal the total amount
that the five banks have claimed from the Ceylon Petroleum Corporation
amounts to US$418 million. This amounts to about Rs 47 billion and not
Rs 230 billion. In this case of the hedging transactions, there are
certain norms to ensure that such transactions are structured in a
proper, orderly manner.
In many countries it has been found that certain hedging deals have
not been structured properly. For example, in China, Korea and India,
there have been instances of mis-selling and there was no liability at
all established in relation to claims that were made by various banks.
The Central Bank looked into the transactions entered into by the CPC
and the banks, and after a detailed investigation, we have made a very
clear determination that these transactions have not been structured
properly, and that these transactions are tainted, and accordingly
should not be given effect to.
There is no money due to be paid by the CPC, but that is not to say
that the banks cannot make claims. If an accident occurs, claims can be
made from the insurance company, but the insurance company may find that
something is not right, in which case, they are not obliged to make the
payment. In this instance, the Central Bank has determined that the
transactions are tainted, and the CPC is not obliged to pay. So nothing
has been paid as alleged neither will any such payment be made.
It was certainly not Rs 230 billion or even Rs 47 billion. Further, I
also know that the Attorney General is defending the CPC in arbitration
proceedings abroad, and he is confident that the country will not have
to pay any money at all.
Q: There was Rs 35 billion VAT fraud. What is this
A: This fraud happened during the
period, November 2002 to December 2004 before President Mahinha
Rajapaksa was elected and became Finance Minister. The amount involved
is not Rs 35 billion but Rs 3.5 billion. Action has been filed against
Q: Has Mihin Lanka made a Rs 4 billion loss?
A: This Rs 4 billion is the total
capital investment of this project, which is a very modest capital for
an airline. You need a initial capital to commence a business and the
Government has made an initial capital investment of Rs 4 billion for
Mihin Lanka and this is not a loss that airline has made. Over a period
of time the company will make money.
Even a grocery business will take some time to make profits. In any
business you need to build the clientele and processors right to make
profit. Normally airlines take at least five years to make profits. This
is not a project that will give profits as soon as you start business.
But now we have seen a break even at Mihin Lanka and over a period of
time it will generate profits. People should not mix up the Mihin Lanka
capital investment with a loss.
Q: SriLankan Airlines also made losses what can you
say about this?
A: This happened not only to SriLankan
Airlines. Last year not a single airline made profits due to the
recession. Japanese Air Lines had a bankrupt, British Airways and
Singapore Airlines also made losses.
High fuel prices and less air passenger traffic had negative impact
on the airline business. In addition to all the global issues, Sri
Lankan airlines had to face more challenges. In the latter part of the
year there were less people coming in because the conflict escalated.
Also, the decline in tourist arrivals due to travel advisories being
issued by certain countries also affected the airline. When all these
matters put together, made the airline suffer a loss. However, when the
global situation eases, the profitability of SriLankan Airlines should
improve. But now SriLankan Airlines is bouncing back to normalcy.
Q: What can you say about the Golden Key and
Sakvithi credit fraud?
A: In each of those there has been shown
developments, even though we are not directly responsible. President
Mahinda Rajapaksa has given a clear indication that he would intervene
to safeguard the depositors in whatever way possible.
So there are certain matters, which are in Courts so we need to
respect the judgements of the Court and ensure that we do not do
anything against those. Within those limits there are things to be done.
Once all the assets are identified and free from encumbrances the
Government will take over the assets and pay them so that there will not
be any delay.
There are other complications where the assets are not free.
Currently we have engaged qualified and experienced firms who are now
advising, as to how this should be solved because there are various
complications and we have to unravel them. This audit firm will
examining it and sorted it out. The Government is presently considering
the issue of treasury bonds to the value of net assets transferred in
settlement of dues.
Q: Last week Sri Lanka was promoted to a
middle-income state. How will this impact on the economic growth?
A: There will be major positive feelings
that will be catered. Actually the economy is working on confidence, on
good feelings and on certain macroeconomic fundamentals. As much as the
macroeconomic fundamentals are important the good feelings as well as
positive feature of a economy are important.
So this graduation of Sri Lanka to a middle-income market emerging
country gives it a new light. Out of all the countries in the world
about 80 countries is termed low-income countries and we were in that
The way people deal with Sri Lanka is different. If you’re in a high
network or a middle network the way the people are treating you is
different from the low network. So when Sri Lanka moves to the next
stage we will be projected as a country, which will have a different
Q: Sri Lanka recorded a single digit inflation rate
after 25 years. How did the country gain a single digit inflation rate?
A: Managing inflation is a longtime
process. So for 20 months we used several instruments that we used to
bring down the inflation rate to a single digit rate.
We kept interest rates at a high level, aggressive open market
operations, reserves money very diligently through all these mechanisms
we maintained the target that we had, we gave clear information to the
market that the inflation will not rise.
At present we have come to a reasonable level of inflation and we
will ensure that we will not get this out of hand at anytime. We think
that it was due to sacrifice and hard work and with an overall
expectation people will think that the country will grow.