Next step for SL economy, $100 billion : Cabraal

The next challenge for Sri Lanka's economy is surmounting the US$100 billion mark, according to Ajith Nivard Cabraal, the Governor of the country's Central Bank. He added that this was an important milestone because it would allow Sri Lanka to "proceed beyond the $ 4,000 per capita income level" and "not fall prey to the deadly 'middle-income trap' that has snared many countries in the past".

Mr. Cabraal made these observations at this week's 25th anniversary convention of the Association of Professional Bankers in Colombo , where he was joined by Dr. D. Subbarao, the Immediate Past Governor of the Reserve Bank of India, who also addressed the audience as the event's Chief Guest.

Elaborating further, Mr. Cabraal also outlined the economy's most recent achievements: "Per capita income doubled to reach over $2,900 in a relatively short period, thereby elevating the country to an 'emerging market economy" status; the economy grew to a robust $59 billion, from about $24 billion in 2004; Inflation was controlled at single digits for more than four and a half years; Poverty levels reduced to around 6 per cent from about 15 per cent; Unemployment reduced to less than 4 per cent; The quality of infrastructure was enhanced to a level comparable with many emerging market economies; Foreign reserves were maintained at over $6 billion; The public debt was managed prudently so as to reduce the debt-to-GDP ratio from a high of 105 per cent in 2003 to about 78 per cent; An over 8 percent economic growth was achieved in successive years 2010 and 2011; Private foreign investment inflows into the government has exceeded $7 billion; The fiscal deficit was limited to 6.4 per cent in 2012, from a high of 9.9 per cent in 2009; The country's 'Doing Business' global rank has reached the 81st level, up from 102nd in 2010, while being poised to jump about 10 places this year; Regional development has made tangible progress and the Western Province share of GDP reduced to around 43 per cent from 51 per cent in 2005; Regular foreign investment has flowed into banks and the stock market; The banking system was maintained in a stable condition even in the midst of very difficult global circumstances".

Additionally, Mr. Cabraal also commented on the specific steps taken by the Central Bank in the recent past to aid in the progress of country's economy, stating: "We established consultative and advisory committees from the private sector for monetary policy and financial system stability; We opened out Sri Lanka Treasury Bills and Bonds to foreign investors; We issued international Sovereign Bonds; We introduced mandatory corporate governance practices for banks and [Non Bank Financial Institutions (NBFIs)]; We developed resolution schemes to stabilise systemically important banks and NBFIs, and when needed, we applied such schemes practically; We established a Deposit Insurance and Liquidity Support Scheme; We fashioned the current 'virtuous cycle' - low inflation to low interest rates to higher investment to higher growth, etc.; We accessed an IMF SBA on our terms, and completed the programme; We intervened in the application of certain fiscal policies, which were sympathetic to inflation behaviour and other macro-economic factors; We implemented tough monitoring of inflation control measures; We introduced some far-reaching stabilisation measures whenever needed; We relaxed Foreign Exchange Regulations on a planned basis".

At the same time, Mr. Cabraal also gave his views on those measures he felt would be necessary for Sri Lanka to grow to a $100 billion economy over the next decade and beyond, saying: "Sri Lanka would need to attract regular capital from outside our shores in order to bridge our current savings/investment gap so as to sustain the over 7 per cent growth momentum. In the past, some persons have been pre-occupied with the notion that foreign direct investments and investments into the government are the only channels through which foreign savings could enter our country. However, we have taken a broader view, and we believe that our savings / investment gap could be bridged through several sources in addition to the traditional sources. As a result, we have encouraged foreign inflows into the banking sector, foreign inflows into the stock and corporate bond markets, and foreign inflows as loan capital into eligible businesses. All these channels have now been made transparent and convenient, thereby making it easy for overseas investors to make their investments. These convenient inflows, with appropriate safeguards for the providers of capital would enable the country to enjoy a sustained inflow of savings, which would, in turn, support the high growth momentum envisaged by the economy".

Mr. Cabraal also opined that Sri Lanka would have to "sustain its poverty reduction strategies as well [as] continue with strategies that are designed to foster balanced regional growth. Over the past four and a half years, an enormous investment has been made in the North, which has resulted in the North- ern Province reaching a reasonable parity vis-a-vis the other provinces. This has been an amazing achievement, and I believe we have now been able to set the stage for a more gradual improvement of all provinces, so that we could bring all the provinces closer to the standard of the Western Province, which has already comfortably surpassed a $4,000 per capita income. The recent infrastructure development drive at rural level, particularly the construction and upgrade of the rural roads and the supply of electricity to every household in the country, together with the massive strides we have made in making finance accessible to all people in all parts of the country, have greatly helped to fulfil these objectives. Therefore, the stage is now well set for the constant upgrade of a variety of services at Provincial level, and the effective integration of all areas of the country, with better roads, technology, communication, business services and banking services.

Such improvements would serve to reduce provincial disparities, and thereby allow the country to achieve its ambitious goal of less than 3 per cent poverty by 2016. At the same time, as a result of the fast tracked development of the provinces, we could probably reach a situation where the GDP contribution from the advanced Western Province would only constitute around 33 per cent, by the year 2025. Such an outcome would indicate a sustained revival of the eight lagging provinces, which collectively accounted for less than 50 per cent of the GDP contribution in the year 2005. Accordingly, if within 20 years, 2005 to 2025, the Western Province share of the country's GDP could be reduced from one-half to one-third, I believe we would be well on track to balanced regional growth, whilst also not depriving the Western Province of the fruits of rapid development. Such a transformation would mean that the cry which led to two bloody revolutions, namely, 'kolombata kiri, gamata kekiri' would be a slogan which could then be comfortably relegated to the dust-bin of history".

Commenting further, Mr. Cabraal also signalled the need for the "maintenance of sound macro fundamentals and the continuous movement of those macro fundamentals in a positive and benign direction. What that would mean, in a practical sense, is that we will have to maintain inflation at low and stable levels for the next decade. That would, in turn, mean that the demand side management would have to be carefully anticipated and managed, while the required interventions in the supply side will also need to be promoted and encouraged. At the same time, the fiscal consolidation would need to be sustained, so that the positive effects of such effort would enable the debt dynamics to improve constantly. Those efforts would also have to be supported by ongoing improvements in productivity, with the resulting benefits influencing the exchange rate as well. Businesses will have to become more productive, competitive and efficient, and the overall expansion of the economy through new fronts, particularly the 5 Hubs and Tourism, would need to continue in a focused fashion. By constantly improving our enabling environment and economic structures, as well as by ensuring that the private sector stays vibrant, motivated and well financed, the economy should be able to consistently grow at over 7 per cent per annum, and in certain years, even exceed 8 per cent. By maintaining such a momentum, our economy would become more resilient and diversified, thereby enabling us to face whatever new risks that could emerge from an unpredictable global environment".

Adding to this, Mr. Cabraal also stated, "we need to continuously ensure the stability of the financial system. In this regard, the banking and the NBFI sectors, as well as the insurance sector would play very important roles, and over the next few years, we are keen that a consolidation takes place in these sectors, in order to have strong institutions within these sectors. In today's hostile and volatile environment, it is necessary for the banks and NBFIs to at least have a minimum critical mass, in order to be competitive, resilient and strong. That would necessarily mean that some of the smaller and less stronger institutions would need to merge with each other, or become the targets of strategic acquisitions in order to create large and strong institutions in this sector. Such a consolidation would also enable the governance structures to improve, as well as reduce today's rather high 'cost per transaction', as a result of the enhanced scale of operations.

Therefore, over the next few years, it would be necessary to fashion and encourage such a consolidation outcome, and the policies that would lead to such an outcome would need to be encouraged".