By Sarah Hannan
The Government's 2021 Budget proposals have been presented and the debate over the Second Reading continues. Amidst a pandemic, the targets that have been set forth for key economic aspects are now being questioned, with the Government now being put on the spot about whether they are being overly optimistic.
State Minister of Money, Capital Markets, and State Enterprise Reforms Ajith Nivard Cabraal was on The Sunday Morning Hot Seat to respond to the many queries on the economic growth plan that is put forth.
Follow are excerpts of the interview:
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State Minister of Money, Capital Markets, and State Enterprise Reforms Ajith Nivard Cabraal[/caption]
Sri Lanka has a history of unfulfilled budget promises that was visible during the tenure of Mahinda Rajapaksa as President and even during the Yahapalana Government. What are the guarantees that your Government, headed by President Gotabaya Rajapaksa, will fulfil all or most budgetary promises?
I don't agree that promises were not fulfilled during the administration of President Mahinda Rajapaksa. That administration used to carefully track the deliveries of outcomes and results against the "Mahinda Chintana" manifesto and successive budgets were presented with the conscious intention of fulfilling those promises.
As a responsible member of that administration, I can therefore confidently tell you that the bulk of the promises and deliverables were either fully honoured or partly honoured. Accordingly, that administration had, in fact, completed almost all announced deliverables within the period that President Mahinda Rajapaksa was in charge.
In the same manner, I can assure you that the promises made by President Gotabaya Rajapaksa which are challenging but achievable, would also be systemically followed up and delivered, and I am sure there would be a deep commitment to ensure that all those promises are kept.
The story however, was quite different in the case of the mixed-up Yahapalanaya Government which had a record of abject failure in respect of almost every deliverable they had promised. Those results are well known and I don't need to elaborate on it.
With the Prime Minister asking people to invest their hidden money and offering to provide tax concessions, what kind of message does it send to foreign markets about Sri Lanka? Isn’t it unfair on businessmen that have been transparent about their earnings?
Certain new and innovative actions need to be implemented at certain times in order to achieve beneficial results. Most people know, as well as understand, that certain incentives have to be granted to those who enter a particular activity at a given time. Sometimes such incentives may appear to be unfair to others who had already been in a particular field, but such strategies are often implemented in order to steer an economy in a certain desired direction. That type of strategy is an accepted norm in an economic context, and in this specific instance too, we are providing a certain incentive for persons who have not yet included some parts of their incomes in their tax returns for some reason or another, to come forward and declare such incomes, pay the stipulated tax, and thereafter use the balance resources in the development activities of the country. Through such action, new funds are likely to be infused into our mainstream economy, which inflows would benefit the projects and activities to which the funds would flow, the economy in general, and the investors themselves.
You have projected a growth of 5.5%; even the projections that came out before the second wave have projected lower than 5.5%. Are you not being overly optimistic and unrealistic?
I firmly believe that Sri Lanka will be able to achieve a growth of 5.5% next year. In fact, my own considered assessment is even higher, at around 6.5%. I say this with good reasons.
First, we will have a low base of 2020, which will enable the improvement to be reflected as a higher percentage.
Second, if we actually bench-mark our growth for 2021 vis a vis the year 2019 (as 2020 was not a normal year due to the extraordinary circumstances which therefore suggests that 2020 must not be used as a valid yardstick), in order to make projections, the results are likely to be even better than 2019, which would mean that 2021 would relatively fare significantly better.
Third, the new investments that are already committed and/or expected to flow into the Port City, port-related enterprises, pharma industries, education, and health sectors are likely to be substantial and those undoubtedly will have a significant impact on growth next year.
Fourth, the steps we intend to take to step up the efficiency of our on-going Government projects to deliver such projects on-time and on-budget are likely to significantly contribute to our GDP (Gross Domestic Product) and consequently support growth. In this regard, it may be pertinent to point out that there are currently around 289 Government driven projects over a value of Rs.1 billion each, which have a collective total investment of around Rs. 5.2 trillion, and that could be a significant pool of projects to stimulate growth, if properly harnessed and activated and;
Fifth, the maintenance of our macro-fundamentals at benign levels will attract a continuous flow of investment that will move our economy into a virtuous cycle, which in turn, will support the growth momentum and lead to higher growth.
Budget 2021 has few revenue-generation measures. Instead, you have said you plan to generate revenue through growth. Is this a realistic move, given that Sri Lanka has to make debt repayments between $ 4-6 billion in 2021?
I think your pessimism is largely based on the failure of the previous regime which was eternally whining about the lack of growth, lack of resources, lack of opportunities, and lack of investments. Such litany of woes was actually due to the total lack of any new ideas to deal with the challenges of managing an economy and their own lack of confidence in their own management. Unfortunately, their weak, corrupt and unimaginative management led to the halving of economic growth, doubling of interest rates, nearly 50% depreciation of the currency, 50% drop in FDI (Foreign Direct Investment), and the almost doubling of the public debt when compared to our previous period in office.
I can however tell you that it'll be quite different now.
We have already established a stable government with clear plans and implementation focus, and investments are beginning to flow in. Since the announcement of the budget, the Port City has announced a further commitment of $ 1,000 million towards its infrastructure development, and a new tyre factory was launched with an initial investment of $ 300 million.
At the same time, the growth in the economy and better tax administration together with a few key but simple taxation measures, will yield the required revenues while the forex inflows from bilateral and multilateral institutional loans coupled with the growing FDIs, stock-market inflows and inflows into the Government Securities would be adequate to meet the outflows.
We also expect export revenue to at least maintain the 2019 levels while remittances are likely to increase by around $ 1.5 billion with import costs being at least $ 3.0 billion less than the 2019 values.
If the Government fails to settle this debt, it would be the first time in history that the country would have defaulted. Can you assure that we will not have to restructure our debt and not fail on repayments?
I have been at the forefront of managing our country's debt during the period 2006 to 2014. During that period, we reduced our debt to GDP ratio from 91% to 70%. We halved our government securities interest rates. We borrowed from international markets at continuously reducing rates of interest. We consistently improved our credit ratings year on year. We extended the average time to maturity of our debt stock by three times. We sourced the funds required for all national needs without any shortfall at any time. We maintained an impeccable repayment record.
But, in just five years of Yahapalanaya, almost all these favourable parameters were reversed with poor economic and debt management. That administration added Rs. 1.8 trillion to our debt stock due to the currency depreciation, and a further Rs. 1.4 trillion due to the undue increases in interest rates. They also went on a massive borrowing spree in a 15-month period from April 2018 to June 2019, where they recklessly borrowed $ 6,900 million by issuing ISBs (International Sovereign Bonds) at interest rates which were nearly 25% higher than the rates at which we had borrowed previously. They allowed the "Foreign:Local debt mix" which was 42:58 in 2014 to deteriorate to 50:50 by 2019.
That administration's reckless actions naturally led to the vulnerabilities that you are mentioning to build up in our debt profile, and today, as a new Government, we are facing the challenges that you have described.
Nevertheless, with our track record of managing complex economic and debt situations, I can tell you that we will overcome the current vulnerabilities and gradually claw back to more benign levels in relation to our debt dynamics. That's certainly going to take a lot of skill, care and patience, but I can assure you, we will deliver on that promise, and while doing so, we will not default.
You have recently said Sri Lanka will never go for an International Monetary Fund (IMF) arrangement. Considering the lower interest rate and higher maturity period of IMF loans compared to individual lending countries like China, can we stay away from IMF completely, considering the debt repayment burden we have in the next few years?
IMF loans are not given to Governments as suggested by you, but to Central Banks. Those loans are therefore essentially for balance of payments support and not for any development or budget support.
Some people think the IMF is the only way forward as they think countries that face challenges need to be "disciplined", and the IMF is the institution that can do so. Some also think only an IMF programme can provide "credibility" to a country's own plans to take their economies forward. However, we all know that more countries have suffered from even greater structural weaknesses after IMF programmes, that those which have met with success, and that is also a factor that needs to be taken cognisance of by country authorities. After all, it is a country's Government that will be responsible to its stakeholders for success or failure in the final analysis, and not the IMF or the World Bank.
Sri Lanka first accessed the international bond market in 2007, and by 2014, we had earned the credibility of hundreds of international investors as was signified with our ISB issues being oversubscribed by 5 to 10 times and our dollar denominated interest rates shrinking by over 35% in that period. By such outcomes, we proved to the world that we are able to deliver on our promises and that we have the discipline to manage our economy with a clear and effective strategy, and with a sense of discipline.
Over the last few years however, the macro-economic management of the Yahapalanaya Government led to some weaknesses building up in our economy. But after we assumed office, we have made a careful assessment of the situation and are now aware of the exact steps that need to be taken to steer the economy back to health.
In the above background, we have formed the view that any IMF funding support will not be necessary for Sri Lanka at this stage, and that is why we have not sought assistance from that institution. Our debt management strategy is also wide and far reaching and I have often articulated the intended measures we are taking in the media as well as in Parliament.
I could further elaborate that as a shareholder of the IMF we can of course at any time reach out to them if we need any specialised technical support or advice, and we may still do that if we believe we can benefit from some specific advice or expertise.
In the meantime, the Central Bank of Sri Lanka has already obtained a SWAP facility of $ 400 million from the Reserve Bank of India for balance of payment support, and is presently negotiating a further stand-by SWAP facility of over $ 1 billion from the People's Bank of China, at much better terms that can ever be negotiated with the IMF. Such a SWAP facility will also serve as an added comfort in a situation of possible stress that may arise if the Covid-19 pandemic were to worsen and push the world into chaos.
Incidentally, may I also state that, by and large, the terms and conditions of bilateral loans from China have been certainly more favourable that those we have obtained by issuing ISBs. In fact, I find it strange that some persons do not to hear or acknowledge this fact, even though we have repeatedly stated this.
State Minister of Money, Capital Markets, and State Enterprise Reforms Ajith Nivard Cabraal[/caption]
Sri Lanka has a history of unfulfilled budget promises that was visible during the tenure of Mahinda Rajapaksa as President and even during the Yahapalana Government. What are the guarantees that your Government, headed by President Gotabaya Rajapaksa, will fulfil all or most budgetary promises?
I don't agree that promises were not fulfilled during the administration of President Mahinda Rajapaksa. That administration used to carefully track the deliveries of outcomes and results against the "Mahinda Chintana" manifesto and successive budgets were presented with the conscious intention of fulfilling those promises.
As a responsible member of that administration, I can therefore confidently tell you that the bulk of the promises and deliverables were either fully honoured or partly honoured. Accordingly, that administration had, in fact, completed almost all announced deliverables within the period that President Mahinda Rajapaksa was in charge.
In the same manner, I can assure you that the promises made by President Gotabaya Rajapaksa which are challenging but achievable, would also be systemically followed up and delivered, and I am sure there would be a deep commitment to ensure that all those promises are kept.
The story however, was quite different in the case of the mixed-up Yahapalanaya Government which had a record of abject failure in respect of almost every deliverable they had promised. Those results are well known and I don't need to elaborate on it.
With the Prime Minister asking people to invest their hidden money and offering to provide tax concessions, what kind of message does it send to foreign markets about Sri Lanka? Isn’t it unfair on businessmen that have been transparent about their earnings?
Certain new and innovative actions need to be implemented at certain times in order to achieve beneficial results. Most people know, as well as understand, that certain incentives have to be granted to those who enter a particular activity at a given time. Sometimes such incentives may appear to be unfair to others who had already been in a particular field, but such strategies are often implemented in order to steer an economy in a certain desired direction. That type of strategy is an accepted norm in an economic context, and in this specific instance too, we are providing a certain incentive for persons who have not yet included some parts of their incomes in their tax returns for some reason or another, to come forward and declare such incomes, pay the stipulated tax, and thereafter use the balance resources in the development activities of the country. Through such action, new funds are likely to be infused into our mainstream economy, which inflows would benefit the projects and activities to which the funds would flow, the economy in general, and the investors themselves.
You have projected a growth of 5.5%; even the projections that came out before the second wave have projected lower than 5.5%. Are you not being overly optimistic and unrealistic?
I firmly believe that Sri Lanka will be able to achieve a growth of 5.5% next year. In fact, my own considered assessment is even higher, at around 6.5%. I say this with good reasons.
First, we will have a low base of 2020, which will enable the improvement to be reflected as a higher percentage.
Second, if we actually bench-mark our growth for 2021 vis a vis the year 2019 (as 2020 was not a normal year due to the extraordinary circumstances which therefore suggests that 2020 must not be used as a valid yardstick), in order to make projections, the results are likely to be even better than 2019, which would mean that 2021 would relatively fare significantly better.
Third, the new investments that are already committed and/or expected to flow into the Port City, port-related enterprises, pharma industries, education, and health sectors are likely to be substantial and those undoubtedly will have a significant impact on growth next year.
Fourth, the steps we intend to take to step up the efficiency of our on-going Government projects to deliver such projects on-time and on-budget are likely to significantly contribute to our GDP (Gross Domestic Product) and consequently support growth. In this regard, it may be pertinent to point out that there are currently around 289 Government driven projects over a value of Rs.1 billion each, which have a collective total investment of around Rs. 5.2 trillion, and that could be a significant pool of projects to stimulate growth, if properly harnessed and activated and;
Fifth, the maintenance of our macro-fundamentals at benign levels will attract a continuous flow of investment that will move our economy into a virtuous cycle, which in turn, will support the growth momentum and lead to higher growth.
Budget 2021 has few revenue-generation measures. Instead, you have said you plan to generate revenue through growth. Is this a realistic move, given that Sri Lanka has to make debt repayments between $ 4-6 billion in 2021?
I think your pessimism is largely based on the failure of the previous regime which was eternally whining about the lack of growth, lack of resources, lack of opportunities, and lack of investments. Such litany of woes was actually due to the total lack of any new ideas to deal with the challenges of managing an economy and their own lack of confidence in their own management. Unfortunately, their weak, corrupt and unimaginative management led to the halving of economic growth, doubling of interest rates, nearly 50% depreciation of the currency, 50% drop in FDI (Foreign Direct Investment), and the almost doubling of the public debt when compared to our previous period in office.
I can however tell you that it'll be quite different now.
We have already established a stable government with clear plans and implementation focus, and investments are beginning to flow in. Since the announcement of the budget, the Port City has announced a further commitment of $ 1,000 million towards its infrastructure development, and a new tyre factory was launched with an initial investment of $ 300 million.
At the same time, the growth in the economy and better tax administration together with a few key but simple taxation measures, will yield the required revenues while the forex inflows from bilateral and multilateral institutional loans coupled with the growing FDIs, stock-market inflows and inflows into the Government Securities would be adequate to meet the outflows.
We also expect export revenue to at least maintain the 2019 levels while remittances are likely to increase by around $ 1.5 billion with import costs being at least $ 3.0 billion less than the 2019 values.
If the Government fails to settle this debt, it would be the first time in history that the country would have defaulted. Can you assure that we will not have to restructure our debt and not fail on repayments?
I have been at the forefront of managing our country's debt during the period 2006 to 2014. During that period, we reduced our debt to GDP ratio from 91% to 70%. We halved our government securities interest rates. We borrowed from international markets at continuously reducing rates of interest. We consistently improved our credit ratings year on year. We extended the average time to maturity of our debt stock by three times. We sourced the funds required for all national needs without any shortfall at any time. We maintained an impeccable repayment record.
But, in just five years of Yahapalanaya, almost all these favourable parameters were reversed with poor economic and debt management. That administration added Rs. 1.8 trillion to our debt stock due to the currency depreciation, and a further Rs. 1.4 trillion due to the undue increases in interest rates. They also went on a massive borrowing spree in a 15-month period from April 2018 to June 2019, where they recklessly borrowed $ 6,900 million by issuing ISBs (International Sovereign Bonds) at interest rates which were nearly 25% higher than the rates at which we had borrowed previously. They allowed the "Foreign:Local debt mix" which was 42:58 in 2014 to deteriorate to 50:50 by 2019.
That administration's reckless actions naturally led to the vulnerabilities that you are mentioning to build up in our debt profile, and today, as a new Government, we are facing the challenges that you have described.
Nevertheless, with our track record of managing complex economic and debt situations, I can tell you that we will overcome the current vulnerabilities and gradually claw back to more benign levels in relation to our debt dynamics. That's certainly going to take a lot of skill, care and patience, but I can assure you, we will deliver on that promise, and while doing so, we will not default.
You have recently said Sri Lanka will never go for an International Monetary Fund (IMF) arrangement. Considering the lower interest rate and higher maturity period of IMF loans compared to individual lending countries like China, can we stay away from IMF completely, considering the debt repayment burden we have in the next few years?
IMF loans are not given to Governments as suggested by you, but to Central Banks. Those loans are therefore essentially for balance of payments support and not for any development or budget support.
Some people think the IMF is the only way forward as they think countries that face challenges need to be "disciplined", and the IMF is the institution that can do so. Some also think only an IMF programme can provide "credibility" to a country's own plans to take their economies forward. However, we all know that more countries have suffered from even greater structural weaknesses after IMF programmes, that those which have met with success, and that is also a factor that needs to be taken cognisance of by country authorities. After all, it is a country's Government that will be responsible to its stakeholders for success or failure in the final analysis, and not the IMF or the World Bank.
Sri Lanka first accessed the international bond market in 2007, and by 2014, we had earned the credibility of hundreds of international investors as was signified with our ISB issues being oversubscribed by 5 to 10 times and our dollar denominated interest rates shrinking by over 35% in that period. By such outcomes, we proved to the world that we are able to deliver on our promises and that we have the discipline to manage our economy with a clear and effective strategy, and with a sense of discipline.
Over the last few years however, the macro-economic management of the Yahapalanaya Government led to some weaknesses building up in our economy. But after we assumed office, we have made a careful assessment of the situation and are now aware of the exact steps that need to be taken to steer the economy back to health.
In the above background, we have formed the view that any IMF funding support will not be necessary for Sri Lanka at this stage, and that is why we have not sought assistance from that institution. Our debt management strategy is also wide and far reaching and I have often articulated the intended measures we are taking in the media as well as in Parliament.
I could further elaborate that as a shareholder of the IMF we can of course at any time reach out to them if we need any specialised technical support or advice, and we may still do that if we believe we can benefit from some specific advice or expertise.
In the meantime, the Central Bank of Sri Lanka has already obtained a SWAP facility of $ 400 million from the Reserve Bank of India for balance of payment support, and is presently negotiating a further stand-by SWAP facility of over $ 1 billion from the People's Bank of China, at much better terms that can ever be negotiated with the IMF. Such a SWAP facility will also serve as an added comfort in a situation of possible stress that may arise if the Covid-19 pandemic were to worsen and push the world into chaos.
Incidentally, may I also state that, by and large, the terms and conditions of bilateral loans from China have been certainly more favourable that those we have obtained by issuing ISBs. In fact, I find it strange that some persons do not to hear or acknowledge this fact, even though we have repeatedly stated this.