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Monday, 12 July 2010

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Lanka most liberalised economy in South Asia

Keynote address by Plantation Industries Minister Mahinda Samarasinghe MP, on ‘Fast Tracking the Economy’ at the 7th Plenary Session of the 24th Conference of the Confederation of Asia-Pacific Chambers of Commerce and Industries (CACCI) and the 11th Sri Lanka Economic Summit organized by the Ceylon Chamber of Commerce on July 7, 2010.

Your Conference theme, which is ‘Facing global and local challenges: the new Dynamics for Economic Development’ is of particular significance to us in present-day Sri Lanka. It is heartening to note that the Ceylon Chamber is facilitating this discourse with a view to fine-tuning the private sector’s strategic response to face the challenges of the current economic environment.


Plantation Industries Minister Mahinda Samarasinghe

As a point of departure, let me set out the context within which we operate today. Nationally we are poised upon the brink of a potential economic take-off which has been made possible by the end of the armed conflict.

The economic indicators are largely positive. As was pointed out in the budget speech made by my colleague Finance and Planning Deputy Minister, due to the resilience of our entrepreneurs, the steadfast determination of our workforce and the policy environment that our government created, Sri Lanka has attained middle income economy status with per capita income rising from USD 1,062 in 2004 to USD 2,053 in 2009. The rate of inflation at 4.6 percent in June 2010 recorded a downward trend for consecutive four months - a salutary macro-economic indicator.

The Sri Lankan economy has registered a strong rebound with first quarter registering a 7.1 percent growth in GDP. The projection for the year indicates that Sri Lanka’s economy may record a growth rate in the range of 6.5-7 percent in 2010. With this renewed confidence, it is likely that Sri Lanka will re-emerge as a country with accelerated economic growth.

The early signs are promising. Foreign investors are investing reasonably aggressively in Sri Lankan Rupee and Dollar denominated debt. As a consequence, our reserve position has crossed the USD 5.5 billion threshold.

Global economic crisis

Contrast this with the situation in the first two quarters of last year. As the war drew to a close, Sri Lanka was in a relatively precarious position with foreign reserves at almost USD 1.2 billion, donor nations holding back aid flows and the general conditions for exports also looking weak due to the global economic crisis.

On the domestic front, domestic consumption and internal trade was also seeing steep declines, as the population was unsure of what the future held. As economic activity slowed during 2008 and 2009, so did Government revenues from tax collection. The consequent increase in the Budget deficit was unnerving. Today, a little over a year later, we are in the happy position of being able to look back and view the economic outlook in May 2009 as if it were no more than a distant memory.

Reflecting this upturn in our fortunes, President Mahinda Rajapaksa told the Sri Lanka-Ukraine Business Forum on June 30:

“I am pleased to inform you that we have succeeded in establishing stability in the country and ensuring investment protection. The Economist Magazine stated a year ago that Sri Lanka is among the few countries with the speediest economic growth. Furthermore, with the elimination of terrorism there is security and stability in every part of the country. Sri Lanka has today reached the status of a middle-income developing country with free market liberalized economic policies.

Today, Sri Lanka is ranked as the most liberalized economy in South Asia. With the post-conflict stimulus, our economy is expected to grow at a rate of 7 percent this year, and Sri Lanka was rated one of the world’s best performing financial markets in 2009 as investor confidence grew.”

Globally, the pace of economic recovery gives us, especially those in developing countries, reason for cautious optimism. The World Bank’s ‘Prospects for the Global Economy for Summer 2010’ report supports our ambitious growth target. It emphasizes that the risk posed by the European sovereign debt continues to be a concern.

Banking systems

According to the Bank, in order to ensure longer-term sustainability, fiscal policy in many high-income countries needs to be tightened sharply over the next several years. Policy that favours a more aggressive reining-in of deficits will, by reducing high-income country borrowing costs, favour medium-term growth in both developing and high-income countries. It says that global GDP is projected to increase by 3.3 percent in the next 18 months, and by 3.5 percent in 2012. Private capital flows to developing countries are projected to increase from 2.7 percent of their GDP in 2009 to 3.2 percent in 2012. Reflecting stronger productivity growth, GDP in developing countries is expected to grow by 6.2, 6.0 and 6.0 percent in 2010, 2011 and 2012.

This is more than twice as quickly as in high-income countries. It goes on to add that limited fiscal space in low-income countries means that if official development assistance were to decline, policymakers in low-income countries could be forced to cut growth enhancing infrastructure and human capital investments. This poses the real risk of number of people living on USD 2 or less per day in 2020 rising to as much as 79 million.

The Bank’s report on the region also make interesting reading. On a regional basis, South Asia remains strong in terms of growth, being only second to East Asia and the Pacific. Although the global financial crisis has had important consequences for economic activity in South Asia, that impact was much less pronounced than in all other developing regions. Regional economic activity benefitted from limited exposures to the sub-prime markets and global banking systems and relatively resilient capital inflows, which increased as a share of GDP.

Fiscal and monetary stimulus in some countries including Sri Lanka, supported activity as well in trade in services and in agricultural products which were less impacted by the crisis than at the global level. Remittances also proved to be a key source of strength for the region during the global downturn.

Reflecting the diversity of its migrant destinations and a rapid and large build-up in the stock of its migrants abroad in recent years, remittances inflows to the region expanded 4.9 percent in 2009 - even as they declined by an estimated 9 percent in the rest of the developing world. And, while they are growing less quickly, remittances to the region have remained positive over the first four months of this year.

The Bank also points to relatively high budget deficits in our region as an area of concern. We are addressing this issue. In the Budget speech, our Government’s stated position was that we consider that the historically high Budget deficit in this country must be phased out in order to reduce the debt burden and strengthen the financial situation so that our people will have better access to finance from our financial institutions. However, we do not believe that such a deficit reduction should be done at the cost of economic growth.

We also do not recognize privatization of State enterprises, selling State assets and cutting down public investments for fiscal adjustment. We believe such adjustment should be done through improvement in the quality of government spending, by putting State assets into productive use and collecting revenue through a broad based and low tax regime. Implementation of such policies will certainly be conducive for business development by the private sector and also be conducive to generate a high growth rate.

Goods and services

I have sought to paint, in broad brush-strokes, the factors that impinge upon Sri Lanka’s economic prospects and the environment in which we find ourselves.

Next let me turn to the role of a Government in a modern day nation-state. The centrally planned economy with Government being actively engaged in the production of goods and services has given way to new paradigm of governance. Modern public governance, as vividly explained in Osborne and Gaebler’s oft-quoted analogy, is more about steering than rowing. Government now gives direction to the ship of state and builds stronger relationships that help in better and more efficient generation of propulsive force, i.e. the ‘rowing’.

Goods and services are primarily produced by the private sector with appropriate partnerships between public, private and voluntary sectors being built to provide more efficient and targeted outcomes. Governance was broken down into three elements - the form of political regime, how authority is exercised in the management of social and economic resources and lastly policy formulation and implementation.

This new direction was allied with concept such as limited government or State withdrawal and ‘reinventing government’. This orthodoxy has been challenged by the recent events on the global stage. To take the maritime metaphor a step further, Government now has not only to steer but to row as a well in certain circumstances and also to standby with a life-preserver when players in the market go ‘overboard’ putting the entire voyage at risk.

The need for active intervention to preserve economic equilibrium and stabilize markets is now recognized and practiced by the very countries that urged us to abandon State intervention and participation in markets.

This does not mean a return to the days of launching public enterprises - unwidely white elephants that were badly managed and a drain on the public purse. We recognize that the requisite skills to manage, innovate and develop business and wealth creation reside with the private sector.

However, our role is not confined to that of a mere policy maker and regulator. The Budget currently being debated in Parliament emphasizes the need for public investment in infrastructure and social expenditure in areas such as health, education, transport and clean drinking water.

In appropriate areas, direct intervention such as in reconstruction and rebuilding of the North and East, special programs on a regional basis to ensure balanced development and active intervention in agri-business to promote food-security and improve our foreign exchange position, are examples of initiatives that the Government of President Mahinda Rajapaksa is undertaking.

I must also point out that our Government views economic growth as related to but distinct from economic development. Our approach and strategy in this regard is laid out for us in the road map set out in the Ten-Year Horizon Development Framework 2006-2016 developed in keeping with the policy goals of the Mahinda Chintana.

Economic development

The advantage of this holistic approach to development planning encapsulated in the ‘Mahinda Chintana: Vision for the Future’ is that we do not focus attention on economic development in isolation but on social, economic and cultural revival and resurgence with equity and justice for all. President Rajapaksa, while addressing the Sri Lanka-Ukraine Business Forum, said:

“Our vision for Sri Lanka’s development is apparent. It integrates the positive attributes of market economic policies and economic growth with our own domestic aspirations for social justice and human development.”

This broad vision for development exceeds mere GDP growth - it implies development that is fair and inclusive and leads to the improvement of the real quality of life of our people. Our efforts in promoting development to combat poverty must not be only targeted at eradicating income poverty but to increase human capabilities and choices - the pith and substance of people-centric human development.

In conclusion, let me advert to the thrust areas of the economy in which we will welcome and provide facilitation for investment. Of course global trends and demands and a host of exogenous factors can affect these areas and compel us to refine, refocus and reorient our aims and objectives. We must be sensitive to these and be flexible enough to respond to new challenges. As the President identified, our cooperation and collaboration with international business partners is key to our success. He said: “In today’s globalized and integrated world, participation in the global economy is necessary to generate national wealth and create employment in domestic economies.”

For our part, we bring to the table a Government that is supportive in creating an investment-friendly climate, a healthy and well-educated workforce, a unique geographical location which is the gateway to South Asia and straddles the key shipping routes between West and East Asia and, above all, a country that is at peace and is rebuilding an reconciling its differences in the aftermath of a long conflict.

Vision for the future

We have worked out our priorities. President Mahinda Rajapaksa in Kiev pointed out that: “It is my intention to transform Sri Lanka into a major centre of naval, trade, air, energy and knowledge.” The road-map provided by the ‘Mahinda Chintana: Vision for the future’ offers investment opportunities to the private sector in a wide range of areas including resort hotels and tourism related facilities, construction, IT and Business Process Outsourcing, skills development, clinical trials and research, plantations, urban development, industrial townships, international shopping facilities, renewable energy, higher education, medical facilities, agriculture, livestock and a wide range of value added manufacturing and services.

Our Board of Investment under the astute leadership of Economic Development Minister Basil Rajapaksa has worked out an extensive sector-based incentivization scheme to promote and facilitate investment. Our plans are in place and we are ready and willing to assist genuine, quality investment that will benefit Sri Lanka and her people.

As the President told a jointly organized Business Forum arranged by our host and the Indian Chamber of Commerce just over a month ago:

“Those of you who are keen to explore, will find abundant opportunities for investment in Sri Lanka. The scope of immense: from infrastructure, to agri-business, to manufacturing and to a range of services. You will also find that our country offers a rare package of skills, capacity and a willingness to learn and adapt. Our policy is vibrant, our package is enticing and exciting and you would do well to join us in our forward march.” I hope you will join hands with us in this forward march in helping Sri Lanka realize her potential as an ‘emerging wonder of Asia’.

I look forward to hearing your views and trust that we can engage in an open and candid dialogue, which will be of mutual benefit.

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