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Sri Lanka must improve economic management, governance: CB Governor

Sri Lanka must improve economic management, governance: CB Governor

Central Bank Governor Indrajit Coomaraswamy yesterday warned that Sri Lanka

would be shut off from international capital markets if it did not improve its economic management and governance.

“There is a much higher premium attached to some economic management and governance at present than in the past”, explained the Governor as he delivered the key note address at the launch of the Economic and Social Survey of Asia and the Pacific 2017: Governance and Fiscal Management Report by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) at the Lakshman Kadirgamar Institute yesterday. He went on to further explain that though the country’s economy had run an exceedingly high budget deficit every single year since 1987, the graduation of the economy to lower middle income status in 2010 meant that the inflow of foreign aid and concessionary loans which kept us afloat all those years was starting to dry up.

“At the same time we now have access to international capital markets. In 2010, we were fortunate as that was also the time that major international central banks were flushing in large amounts of liquidity into the commercial system. At that time, we had negligible amounts of commercial borrowings, so we aggressively borrowed but on the economic governance side we did not screen the projects as we could have done and the rates of return have been somewhat disappointing”, Coomaraswamy said.

He added that with access to international capital markets came exposure to rating agencies which were at times harsher than the IMF, “If we don’t have economic governance, we will be cut off from funding and we have to go to international markets for funding and to pay off our debts,”the Central Bank Governor explained.

To bring about more consistent and predictable economic policies which are key for growth, the Central Bank he said was putting in pace frameworks for macroeconomic policy formulation,

“Since liberalisation of the economy, we have had repeating cycles of stockbroker policies where we artificially create growth which is not sustained through investments. This is done by pumping money through the budget, keeping interest rates artificially low, keeping the exchange rates over valued to suck in imports. You can do that for a year or two but then you have the crunch, a large budget deficit, balance of payment problems and inflation goes up”, said the Governor as he explained that their fiscal framework based on recommendations from the IMF extended fund facility would target a budget deficit of 4.6 percent of GDP at the end of this year and a target of 3.6 percent by 2020,” he said.

“We will follow a monetary policy framework which will have a flexible inflation target and a proactive look to monetary policy. With the exchange rate we will no longer try to balance it by spending our limited foreign reserves. In 2011-2012, USD 4 billion was spent on it but the rupee depreciated by 14 percent. In 2015, the government spent USD 2 billion and it still depreciated by 10 percent. So we will only try to smoothen any speculation or wild fluctuations, otherwise it will be managed flexible and gradually brought down,” Coomaraswamy said.

He also stressed that the main adjustments to the economy would be revenue focused,

“There is no longer a risk premium attached to our economy due to the conflict so the government will in future only provide incentives related to upfront investments. And we will also look to change the revenue composition and the Prime Minister hopes in the immediate future to change the indirect to direct tax composition to 60: 40 from 80: 20”.

Overall government expenditure which has stood at 20 percent of GDP, said the Governor was not high but there were issues in relation to the composition and quality of the expenditure which has had disappointing returns.

The UN ESCAP report this year highlighted that many of the economies in the Asia and Pacific region were moving towards domestic demand driven growth rather than growth driven by external demand but Sri Lanka has chosen to focus on external growth,

“The biggest indictment of past policies that it has allowed our exports and tradeable goods sector to be halved. We need to have a strategy of a growth model based on private sector led, exports driven growth with a large component from FDIs”, he said and added that the government did not have the fiscal space to take on more borrowing to drive development.

“Our location and excellent international relations can trump the head wings coming from the global economy. But we need to get right; our policy framework, macroeconomic policy framework, investment climate, investment policy, trade policy and trade presentation. If we can bring all this together and the government is trying to do that, we in Sri Lanka can go with a growth model based on external demand”, said an optimistic Governor. (Daily News)

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