As Sri Lanka faces the twin evils of a political as well as an economic crisis, National Economic Council (NEC) Secretary General Prof. Lalith Samarakoon in an interview with the Daily News spelt out the dangers of what we are looking at and the possible measures the government could take to bring the economy back from the brink.
Excerpts follow:
Q. Could you explain what the role of the NEC has been so far and what it has achieved?
A. The National Economic Council (NEC) was established last year to create an institution where economic decision-making takes place in a disciplined and systematic manner, rather than in an ad hoc or inconsistent manner.
At this point, we are strengthening the NEC. It has three important pillars: economic affairs, financial affairs, and fiscal affairs. So we can map out the entire economy with these three components. We have deputy secretary generals in charge of each section and we are recruiting more people and moving to our new office at WTC in November.
We are also forming a National Think Tank to get experts of various kinds to help with national economic matters. The NEC also proposed a jobs-and-growth programme – an economic revitalisation strategy to be included in the next Budget where the focus is creating jobs and enhancing the income of the people in this country.
I proposed a national economic programme which was accepted by the NEC and consisted of macroeconomic and microeconomic growth strategies at the grassroots level, and also, structural reforms that are needed for the country’s economic progress. It was through the National Economic programme that the NEC proposed the Rapid Rural Economic Programme (RREP). However, it was later taken over and renamed by the Finance Ministry and implemented as Gamperaliya. The implementation was not in the way that we proposed.
Gamperaliya and the loan programme, Enterprise Sri Lanka, are good, but later it took a political turn and whether it was really creating entrepreneurs in Sri Lanka is a question. Did the programme actually undertake a feasibility study of the proposals put forward and only then issue loans? Was that procedure followed? It is doubtful.
What we proposed through the RREP was to provide Rs. 50 billion for a three-year project and in every grama niladhari (GN) division, 10 projects would be identified – either individual or small company – and they would be given seed capital to start their enterprises. The main aim was to create jobs. We have around 14,000 GN divisions. We can give seed capital to at least 150,000 and even if one creates two jobs per project, we have 300,000 jobs created.
Providing entrepreneurs with loans and having them build their businesses is very difficult. They have to bear the burden of the loan too. Usually, entrepreneurs are funded by venture capitalists who can take that risk, not through loans. Also, the success rate of new businesses is low. If you start 100, only 10 would succeed. And when we give all these people loans, they are going to be in trouble, and then Enterprise Sri Lanka says that the government would subsidise these loans, and that would be through state banks, funded by the Treasury. Eventually the entrepreneurs won’t pay, affecting the banking system.
Because of this, by next year, the number of non-performing loans would increase, creating a big issue in our banking system. We need to recognise this and create a real production economy through jobs. And the state cannot do that, so we need to develop small- and medium-scale entrepreneurs. That is what we have proposed, and we are awaiting funding. If we receive the necessary funds, the NEC will implement it.
One of the key things we also did was to discuss the fertilizer issue with paddy farmers. We brought 200 farmer organisation leaders to the Agriculture Ministry for the discussion and it was very clear that what they wanted was not cash but fertilizer. So we reformulated the fertilizer subsidy as a ‘kind’ strategy, not ‘cash’.
We also met with a lot of local industries and spoke to them of their issues. In terms of things with which we did not agree, we did not endorse the automatic fuel pricing formula strategy. The NEC also advocated not shifting the Public Debt Management from the Central Bank to the Finance Ministry.
There are 10 members in the NEC: the President (Chairman), Prime Minister, Finance Minister, Central Bank Governor, NEC Secretary General, Secretary to the President, Secretary to the PM, Finance Ministry Secretary, Secretary to the National Policies and Economic Affairs Ministry, and the Cabinet Secretary.
It is important to realise that we have a very methodical way of handling economic matters.
When economic matters are brought to the NEC (even through line ministries), we first have technical meetings where we discuss the matter with the relevant stakeholders and if approved, then we take it to the formal meeting of the NEC, and thereafter, to the Cabinet for approval. Here you see the political authority and the bureaucracy working together. The President and PM working together, and we report directly to the Cabinet.
This is a systematic process of economic decision-making and this is important no matter which government is in power. If you are to manage a country’s economy, you need a centralised system where ideas are filtered, without ad hoc decisions made, or line ministries putting their own Cabinet papers about the economy. And solutions have to look at the social, economic and environmental aspects and this institution has the capability to do that. We have thus created that framework and it is within that framework that economic decisions would be made in future and we assure the people and investors that we have created a disciplined approach. This creates predictability and trustworthiness in the economic system.
The NEC will also provide guidance and review of Budget proposals.
Our country should be growth-oriented. Growth is at a low rate. In the last three years, it fell further. In 2017, we recorded the lowest growth rate after 16 years with 3.3 percent. Considering our economic issues, we need strategies that would raise incomes of families and that can only be done through higher growth. So the Budget should focus on higher growth and outline how that should be that be done: through private industry, FDI or small- and medium-scale enterprises.
We also discussed the depreciation of the rupee many times at the NEC and heard from the Central Bank and the Finance Ministry and brought key industry figures and academics from around the country to a NEC meeting and asked them for their views.
We want to give people a forum to come and express their views freely so that the policymakers can listen to them when crafting their policies.
At present, the Budget scheduled for November has been postponed. So there needs to be another Vote on Account and thereafter, the Budget is probably going to be presented by January.
We want to strengthen the NEC so that no matter which government, we will have stable economic policy decision-making. We are going to bring in an Act of Parliament to make it a statutory and permanent body of the government. A year later, we now understand the best possible way to manage the NEC.
Q. Could you speak of the current economic situation we are in?
A. There are certain fundamental factors we have to recognise. One is the low economic growth. In the last four years, it has shown a decreasing trend (2014 – 5 percent, 2015 – 5 percent, 2016 – 4.5 percent and 2017 – 3.3 percent).
To resolve our economic issues, we need to grow consistently at about 8–10 percent for 10 years. But low growth rate was always what we saw, and it never really took off.
Second is the depreciation of the rupee. We know that the depreciation of the Sri Lankan rupee has accelerated in the recent past. As of Friday, the rupee depreciated by 12 percent this year, the highest between 2010 and 2018; in 2012 it was at 10.4 percent. This is a good indicator of the state of the economy. If you look at why, the answer is that we have twin deficits – Current Account and Budget.
Of course, the depreciation of the rupee has been worsened by external factors such as the increase in US Federal Reserve interest rates, but that was 100 percent predictable. In 2015, we were told they would increase interest rates, and the first increase was in 2015. The Federal Reserve also said there would be increases in future too. We knew that too. So we should have been more prepared. We should have encouraged more FDI – only last year we got US$ 1.9 billion, otherwise it has always been less than US$ 1 billion. All along, we did not attract FDI on a large scale, and our foreign reserves never developed.
In the Current Account balance this year we have a deficit of 2.9 percent. In 2017, it was 2.6 percent. This is high. This means that our imports are greater than our exports, more demand for foreign exchange than supply. And as the Current Account deficit grows, it affects our foreign exchange reserves.
In 2017, we had a 5.5 percent budget deficit, in 2016 it was 5.4 percent, and in 2015, it was 7.6 percent. In our country, after 2010, the Budget deficit has never been below 5 percent. The lowest was 5.4 percent. And this year, 5.3 percent. We have a very high budget deficit which is not sustainable.
The current economic crisis is common to many countries, but we need to overcome these twin deficits and develop Budget and Current Account surpluses.
To have a Current Account surplus, we need to have more exports and like the government was saying, have an export economy, but sadly, it was something we have been saying from 1977, and it is not something we should be saying in 2018 too. What did we do all these years?
The Budget deficit is a sign of not developing an export sector to compete in global markets and we have lived beyond our means.
When a common currency was agreed upon in Europe, all countries agreed to two rules: the Budget deficit should not be more than 3 percent, and the debt to GDP ratio should not be more than 60 percent in each country. But many did not follow this and are now in crisis.
Even the so-called developed countries fell into crisis because they deviated from economic fundamentals. This is a good lesson for us.
Our debt to GDP ratio last year was 78 percent, this year it is 77 percent. Along with the 5.3 percent Budget deficit this year, the pattern is clear. It is not necessarily the amount of debt, it is whether we can afford it and pay back.
From 2019–2023, we have a large mountain of debt to repay. Next year, we have to pay back over US$ 5 billion, and from then on, US$ 4–6 billion in foreign debt (principal and interest).
This is the reality any future government will have to tackle. We can look at short-term solutions, but we have now exhausted even those options, we have now come to the end of our journey.
We now have only US$ 7–8 billion in foreign reserves and we need at least US$ 5 billion for four to five months’ imports. With the rest, we have to pay back loans. We have around US$ 1.4 billion invested in Treasury bonds and capital markets, and the worse the crisis, the faster they will leave.
In my opinion, we need to have at least US$ 14 billion in foreign reserves to be comfortable.
We need to tell the people and politicians, this is the reality. If this political crisis continues, with such an economic situation, there will be big problems.
The government should be serious about preserving our creditworthiness; it is critical to maintain investor and business confidence in the Sri Lankan economy. If we lose that, we will have trouble raising money for the loans we have to repay. Whichever government comes into power, we have no alternative but to take loans to repay loans and that can be done only if our credit ratings are good. It is important that the economy is handled prudently and carefully during this period of transition. We need to maintain our ability to borrow from international markets. Credit rating agencies are watching us closely.
We are in a very tricky situation. We need to recognise this and manage the economy during this difficult situation. We need to maintain fiscal discipline and move towards a growth strategy. The next Budget would be functioning in this economic crisis and will be a decisive one and would have to tackle these issues.
We have had positives, but right now the negatives are outweighing them. The responsibility of the government in the next six months is to stabilise the economy. FDI and export growth cannot be done overnight.
So in the short term, that includes imposing certain import controls on non-essential luxury items and establishing a monitoring mechanism to ensure that exporters bring back export revenue within the stipulated 120 days – we may have to even look at shortening that time period.
Also, we need to think of emergency lines of credit, borrowings, and credit facilities from other Central Banks and governments to build foreign reserves.
Then our own capital markets have to be developed, including capital formation and savings.
In the recent past, the government wanted to increase revenue through taxation, but that alone will not solve our problems. Tax policy has to be reviewed in the next Budget. It is a burden to the common people, businesses are complaining about it, and changes in the tax policy are ad hoc.
Also, we have a luxury state structure with wasteful expenditure not suited to our country. So the Budget should focus on reducing wasteful expenditure; the state can then give concessions to the people and tax luxury items (which is fair). If the people are not with us, nothing can be done. They need to live on their wages.
Our economic philosophy should be liberalising trade carefully by looking at the advantages and disadvantages of bilateral agreements. We have to look at their feasibility. We have to trade with other countries, but we have to be careful whether we need to sign multilateral and bilateral agreements without analysis first.
Then domestic agriculture must be made profitable through proper subsidies, incentives and marketing. This is also important for food security. It is fundamental to our thinking.
Lastly, local industries which are contributing to our economy, GDP, jobs and income need to be encouraged. Existing industries should be given incentives and protection as necessary. For example, the government introduced the sugar tax for health reasons. It was fair, but it affected local fruit juice manufacturers who were mostly selling to local retailers. Their prices went up by Rs. 15 to Rs. 20 and sales reduced.
On the other hand, the Agriculture Ministry and other agencies were promoting fruit cultivation and production, but they couldn’t sell with this tax. This is an example of inconsistencies in taxation. When we spoke to the Finance and Health Ministries, they said they can’t change the tax and then the local manufacturers were complaining. So when we make policies, they have to be balanced.
Local industries must be preserved; all countries from Thailand to Japan to the US are doing this. Trump is renegotiating trade deals as the US experienced large-scale job losses and erosion in the industrial base as a result of free trade agreements and globalisation. When the world is moving towards protectionism, we have to understand that there is a reason for this. Even China is focusing on developing its domestic economy. We are trying to repeat what was happening 20 years ago, and not responding to current market trends.
If we integrate too much into the global market, global shocks will always affect us. To minimise this, we need to have our own domestic markets developed; we can trade, but first we must protect our own.
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