Sri Lanka Brief
FeaturesCCC chairman red flags growing debt

CCC chairman red flags growing debt


* Wants economic summit to focus problem areas exports, FDI and govt. expenditure
The country has fallen short of achieving its economic goals and progress has not been smooth despite the significant economic gains over the last few years, Ceylon Chamber of Commerce Chairman Suresh Shah told the inaugural session of the 14th Sri Lanka Economic Summit yesterday (09).

“As we move forward towards our economic goals, we must be conscious of a red flag on the horizon; the composition of our debt. Over the years, we have increased our exposure to commercial borrowings. This is not unexpected and indeed it is a challenge that we must face in our development process. However, we must never underestimate the ruthless nature of financial markets; they are professional and unforgiving, wonderful friends of a disciplined, well-managed economy but cool strangers at the first hint of trouble,” Shah warned.

The theme of this year’s summit is ‘Rebalancing the Economy’ after financial markets have long acknowledged the short term boom and bust cycles cause by policy inconsistencies.

Speaking about the summit’s them, the diplomatic CCC chairman said, “At first glance, this might suggest that our economy is off balance. This however, is not the case. In the last few years, the Sri Lankan economy has been growing at relatively fast pace, substantial investments have been made in infrastructure, tax reforms have been implemented and inflation has remained below double digits. Then why re-balance? Because, we are some ways away from the targets that we – as a country – have committed to. And because, to bridge the gaps, we must commit ourselves to serious reform.”

“The most prominent amongst the targets is the rate of growth. The Government’s development plans speak of an 8% – 8.5% rate of growth in the short to medium term. However, in 2012, growth slowed. Economists called it “overheating” giving the impression that time-to-time brakes need to be applied to a fast moving economy. But must we stop an economy on the move? Can we not sustain the pace? Indeed, how do we sustain the pace? In a sense, this is the most pressing economic question we face and I do hope you give it due consideration over the next two days.”

Shah suggested three points to stimulate debate over the two-day summit, issues that have time-and-time again been taken up the country’s economists, think thanks and market analysts over the years, with little to show things have improved.

Shah said Sri Lanka must become an export-centric nation.

“We are too small a country to sustain growth by trading amongst ourselves. More importantly, we are an import dependent country; the stronger our growth, the greater the demand for imports, be it for consumption or production. Further, Government revenue is strongly linked to imports. Therefore, we cannot afford to curtail imports but we will be forced to – as we were in 2012 – if our balance of payments gets out of sync. Building a strong, sustainable, export centric economy will keep our trade balances and hence balance of payments, under control. Diversifying our basket of exports into value added goods and services and broadening our export markets – particularly into Asia – must form a central part of the strategy,” Shah said.

“Second, we need FDI. Investments must reach approx. 35% of GDP, for growth to reach 8%+. As of now, we have a shortfall of about 5% of GDP – or USD 3 bn per annum – which must be sourced from overseas. In terms of global FDI flows this is not a large sum but certainly a quantum leap by Sri Lankan standards. In terms of attracting FDI, Sri Lanka does face some challenges, of which, let me touch on two.

“One is the size of our market and the other is the less than complimentary press we receive in investor countries. The former can be addressed via bi-lateral and where possible, multi-lateral trade agreements. In this context, we urge the Sri Lankan government to fast track the Comprehensive Economic Partnership Agreement with India, subject of course, to the details to be negotiated. India has acknowledged the need for an asymmetric agreement in favor of Sri Lanka. This must give comfort to local businesses that have genuine concerns of Indian products and services flooding local markets.

“A second – and again valid – concern is the possibility of the Sri Lankan economy becoming too dependent on India in the event of CEPA. But let’s address this challenge through a portfolio of trade agreements. For instance, could an agreement with ASEAN help balance the scales? Under the circumstances– and also to minimize the unpleasant press – we must leverage our foreign policy as a strategic tool in our development process.”

Shah’s third point he hoped would be debated at the summit was managing expenditure.

“Being an emerging economy we must increase investments in essentials such as education, health and infrastructure. However, swift increases in revenue are hard to come by and in the short term, prioritizing expenditure may deliver the best results. In this context, the productivity of state owned enterprises must be considered. In 2012, lossmaking SOE’s made a combined loss of Rs 191 bn. The recent increase in electricity tariffs – which the Chamber accepts as necessary with the proviso that generating costs must be addressed – will help to reduce these losses significantly. Nevertheless, stronger reforms are necessary to address the SOE’s; at the least, their management must be professionalized. At best, they must be privatized. A realistic solution probably lies somewhere in-between; possibly in listing commercially oriented SOE’s with the government retaining majority control,” Shah said.

“The economic opportunities and challenges we face are well known. Yet, we somehow seem to come up short, the progress not as smooth as we would wish. I believe this is because the many stakeholders of Sri Lanka don’t play together as one team. We are hesitant to trust each other, we are not as open-minded as we should be and at times, self-centered rather than Sri Lanka-centered. This is counter-productive. If, however, we all work together as partners, our dream of a prosperous nation will be a reality,” Shah said.

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