Vision 2020: The way forward:

Government meeting challenges successfully

Text of the speech by Professor A D V de S Indraratna at the 23rd OPA Annual Sessions held on September 15, 2010. Deputy Finance Minister and Senior Advisor to President Dr Sarath Amunugama was the Chief Guest

The theme of today’s Annual Sessions is more or less a continuation of the dialogue we started a year ago with ‘Challenges of the Aftermath of the Cessation of Terrorist Hostilities’, the theme of last year’s Annual Sessions. This years’ theme is of great importance and relevance as a follow-up of last year’s Annual Sessions. In my introductory address at the inauguration last year, at least some of you may recall, that I referred, in some detail, to the challenges the Government had to face and the new opportunities that had opened up, in the aftermath of the conclusion of the terrorist war in May 2009.

I will only very briefly refer to it: To begin with, I must say, that it is heartening that the Government has successfully met most of those challenges.

For example, the challenge of the resettlement of as many as 300,000 odd internally displaced, the Government has successfully met by resettling more than 90 percent of them up to date; another challenge, the revitalization of the Eastern and Northern Provinces is being accomplished by the restoration and reconstruction of terrorist devastated infrastructure of roads and bridges, irrigation, power and communication etc. with Negenahira Navodaya and Uthuru Vasanthaya; the challenge of rehabilitation of the mentally traumatized and physically handicapped civilians as well as armed personnel might have also been satisfactorily met, but the Government still faces a big challenge in healing the wounds of the recent past.

Skilled manpower

To this end, it is praiseworthy that the Government has appointed the Lessons Learnt and Reconciliation Commission (LLRC), giving full expression to the principles of transparency and accountability. While facing the challenges, the Government has been utilizing the opportunity of liberation of one third of the country’s territory and two thirds of its sea coast, for restoration and further development of agriculture, fisheries and tourism.

The Government is also utilizing the vast pool of skilled manpower with the release of the Armed Forces from the battlefield. For example, they are now being used for delivering essential services such as rebuilding habitats and restoring vital physical infrastructure to whole tracts of formerly decimated land and more recently, using them even in a campaign like eradication of Dengue which has assumed endemic proportions, for clearing up breeding places of dengue mosquito.

The way forward

Meeting the challenges and utilising the opportunities, as I have briefly examined, the country must forge ahead in the next 10 years or so with sustained high growth to realize the full benefit of the peace dividend. If Sri Lanka can double its per capita real income (not money income) or the average standard of living in 10 years, I would consider it a record achievement. For even Republic of Korea, an Asian Tiger took 11 years to achieve this (then considered a miracle). That is why the OPA opted to choose the theme as vision 2020, timewise going beyond Mahinda Chintana Idiri Dekma. In order to achieve this vision, the economy must grow at an average annual rate of 8 percent.

To sustain a growth rate of 8 percent, the present wide gap between the rates of our gross investment (around 27 percent) and domestic saving (17 percent) must be at least reduced, if not eliminated all together, on the one hand, and efficiency of our investment or productivity of capital enhanced, on the other. This requires a multi-pronged attack. In order to increase productivity, a host of measures must be implemented such as enhanced physical and social infrastructure, good governance with law and order and without waste and corruption, a competent and independent public service and efficient public institutions etc. Mahinda Chintana Idiri Dekma has also highlighted most of these. I like to emphasise here that the increased efficiency of investment by reducing the capital output ratio reduces the required level of investment to produce a given/targeted level of growth.

Private sector

Quantitatively too we can reduce the investment-savings gap or the resource constraint: To this end, firstly, savings must be promoted by reducing the budget deficit by the Government and by encouraging private sector savings by maintaining real market interest rates at positive level (i.e., nominal rates above inflation). The Government has already put in place several measures to bring the budget deficit down from last year’s near 10 percent to 8 percent (we may hear more about this in the address of our Chief Guest). Real interest rates have remained positive since 2008 with inflation coming down to single digit. We can, therefore, expect domestic savings to increase somewhat. But such increase will be hardly adequate to close the gap between the required investment and the available savings. Therefore, we have to have a substantial increase in FDI (Foreign Direct Investment).

In 2008 our FDI amounted to around US$ 800 million (rounded), one of the lowest, if not the lowest, in the whole of Asia.

This was at a time when our inflation was very high. In 2009 and the first half of 2010, when our inflation has fallen to single digit and our economy has been rated high by foreign rating agencies, our FDI has paradoxically come down: In 2009, it was US$ 690 and in the first half of 2010 only US$ 200 million. Is this due to the lack of a so-called enabling environment with good governance, law and order, industrial peace with good labour laws, efficient public institutions, simple customs, licence and other official documentary procedures, to name a few? This is a matter which requires the serious attention of the Government and we are glad that the Government has already appointed a task force headed by you, Dr Amunugama to examine this impasse.

Domestic savings

Mahinda Chintana Idiri Dekma or Vision for the Future contemplates on achieving a growth rate of 8 percent - 10 percent in the next five years, a shorter period than in the OPA Vision. To achieve such high growth, a gross investment of 34 percent - 42 percent is necessary with the prevailing level of efficiency or productivity of our investment or capital (or output/capital ratio). With the present rate of domestic savings of about 17 percent, unless there is a doubling of this level of efficiency of investment or capital it is difficult to sustain such high 8 percent - 10 percent growth. Doubling domestic savings to such extent as to get closer to the required level of gross investment is by no means easy either.

While attempts should be made to attack the problem on those fronts as well, the most effective way of reducing the investment-saving gap would be increased foreign investment. Increased foreign borrowing should not be considered in anyway a substitute for it. Foreign borrowing is accompanied with a burden of payment of interest and capital refund increasing the debt service ratio. FDI, on the other hand, comes without any burden, but often with the added advantage of technology transfer and birth of new or niche markets. We hope the task force will soon come out with remedial measures to resolve this impasse.