'Relationship between IMF and Lanka stands at its best'

Ramani KANGARAARACHCHI

One of the main aspects of the global economy is the euro zone crisis. Several countries in the EU namely Greece, Spain, Ireland, Portugal and Italy were threatened with financial collapse. The main reason for this is that these countries carry a huge impact on social and welfare programmes, said international Monetary Cooperation Senior Minister Dr. Sarath Amunugama.

He was interviewed by Daily News Business for the new feature starting today, Mr. Minister

How Sri Lanka will cope in the backdrop of Euro zone crisis?

They have to borrow from banks and neighbour countries to offset the budget deficit. In other words their income both domestic and through trade is not sufficient to their budgetary commitments. Since they have a long tradition of politically motivated handouts they are now faced to cut back subsidies because banks do not lend money to them. This leads to dissatisfaction in the work places and streets where the workers have been used to have a grand time with borrowed money.

However these loans come with many conditions. The main thing is that they should cut down subsidies and welfare programs and learn to live with their means. This leads to political crisis where leaders have to handover power to tough financial ministers who are not afraid to cut down subsidies.

How does this affect Sri Lanka?

When there is no growth in the euro zone which is one of the biggest market in the world there will be less demand for our exports. Their exports are two kinds. Products such as rubber, coconut fibre will face a slight loss of demand when EU industries cut back. Secondly when buyers of tea which are consumption items will also face a cutback. They have less money in their pockets. But compared to other developed countries like China, Malaysia and India our export sector is limited. Actually advantage to our economy has been largely through agriculture and service sector. So we will probably be less affected than the big export countries.

Other aspect with the bail out package of the EU and IMF is that these sick economies will begin to be healthy.

Earlier politicians were not willing to become rational since it would result in loss of votes. But now they are forced to forget votes and create a much better realistic economy. So they are likely to become more healthier economies. In the long run these healthy economies will turn better and ailing economies will be heading for trouble. In my view too crisis has helped politically motivated countries to cut down on subsidies and getting to the world of trade manufacturing and investment. So called socialist politicians in countries have been kicked out of office. Tough new finance ministers have taken over and we hope they will be able to stop the rot and make these economies viable.

Will current focus on infrastructure help the rural economy?

One of the chief policies of the present government is to develop infrastructure of the country. Without infrastructure an economy cannot grow. China, India Brazil and Russia will become strong economies because they invested on energy, transport, harbours and roads. Particularly a nation like Sri Lanka had to invest in our ports and shipping which is our life line. Very few people know that two third of the world shipping lines go pass Hambantota. The sea lanes from middle east to far east go along Sri Lankan coast. On the other hand Sri Lanka is a hub for travel and tourism. We have a advantage being able to move from middle east, India and far east. No other country has such a hub position. So it is very logical that we develop our ports, airports and harbours.

Another point based on my experience with international organizations in the coming decade will be focusing on what is called blue economy. This is a concerted attempt to harness the resources of the sea for mankind. The resources specially land based resources are fast developing largely to population increase and environmental degradation. Hence mankind should focus on the sea for survival where most of the resources are available in the two key areas of energy and fuel.

Due to our strategic position. Sri Lanka is well positioned for rapid growth under the forthcoming blue economy. Hence we should have a vision of harnessing the sea because in the future sea will be equally important as land.

With regard to IMF does the WB and IMF support Sri Lanka in development efforts as it used to?

The relationship between IMF and Sri Lanka stands at its best. We have been allocated USD 2.6 billion at a stand-by arrangement. Sri Lanka is one country which has stabilized its economy. In terms of global criteria we have restructured the economy. The budgetary deficit has been drastically reduced. Interest rates have come down. The rupee is stabilized as a currency. Unemployment and poverty levels have come down. So we have managed our country well during the last few years. This has been recognized by both WB and IMF.

Now we have considerable foreign resources at our command. Equally we can expect considerable dollar income to the country through remittances, tourism and exports. Hence we are in a stable position Also we have progressively reduced our foreign debts. Global rating agencies have given good ratings which helps us to lower interest rates or sovereign and other bond despite lower interest rate. There is a strong appetite for Sri Lanka. Of course we have a research economy. It has to be managed day by day, and week by week. We have to review foreign factors in taking economic decisions, oil and food prices have to be carefully watched. So far we have got our macro economic conditions right and established the great path of eight percent GDP growth. These are great achievements by any standards and have been recognized by IMF with rating agency and the private sector.

What affect would the devaluation of rupee have on the economy?

The Sri Lankan economy has special characteristics. On one side we have to expand our export base. Today the slogan of growth in the world is "export, export, export". The famous saying is export or perish. On the other hand we have to keep a watchful eye on imports. Today our imports cost much more than exports leading to a balance of payment deficit which have to be tackled. Last year we bought half a million vehicles of different conditions. Old and new "under valued". There was a flood of foreign consumer items which threatened to under cut local industry. For example ceramic industry which has lots of potential has to be safeguarded. Equally companies like Singer, Abans and Richard Peiris which are manufacturing some important items cannot be swept away by rushing in of products due to a cheaper rupee. On the other hand our economy shows that we have to pay huge bills for old machinery and infrastructure. Devalue of rupee means we have to find money, more rupees to pay for all these. Equally our foreign debt requirement have to be calculated at a higher rupee rate. All these factors have to be balanced when we think of the exchange rate. But the overriding economic wisdom is that we cannot shut out the market fluctuations. So the problem is to seek an exchange rate which can balance these two imperatives. My personal opinion is that we cannot shut out the market for a long term by intervention. Reality will prevail.

Can we achieve nine percent per capita income and what is the target that government has set to reach this target?

This year GDP growth is 8.2 percent. Years 2010 and 2011 showed us that we can reach this target. Of course all GDP targets are indicative targets. Some factors we cannot control such as climate and food. If all these things are in order we should remain at eight percent growth. The main reason is North and East is integrated with the national economy. We must remember that the north and east people are outstanding farmers and workers. The rural farmers and workers are pushing our economy forward. Urban workers are fast becoming redundant. With the coming of new technology these urban workers have to work harder or perish. Sri Lanka has to remove these parasites who are dragging large part of the national income. They do not add anything to the national economy. But they are asking for salary increase where it should be the reverse. But it cannot be done due to political reasons. Their salaries should be reduced and more funds should be allocated to farmers and workers in rural areas.

There will be a pull from rural areas to urban areas. What the worker do not realize is that by such behaviour they are forcing investors to seek new science and technology to replace them. This leads us to go for a complete change of our education system. People who have vested interest in the old system are agitating but they do not realize that unless our education system is modernized and if we do not focus on these new sectors there will be economic problems. No work more pay syndrome has to be replaced with people who can adopt to new technology.