Central Bank looks ...

Through this process, consumption could be funded through the 100 day programme where commodities prices would be reduced. This way we have a better chance than China of stimulating the consumption side in the economy, since we have a large Sri Lankan expatriate workforce who will send more money home now that confidence has been restored. I’m optimistic that remittances will rise above the US$9 billion mark annually.

What are your comments on economic growth and allegations that data was doctored and didn’t reflect the true situation?

From my initial findings here, the direction was broadly right. Even if growth was tweaked by 0.5 to 0.7 per cent higher than what it was, that doesn’t make a major difference either way.

Also remember, there is a major re-basing exercise at the Census and Statistics Department at the moment where items like haircuts, illicit alcohol sales, etc come into the calculation. This will be announced in June and when that happens there would be a big lift. The entire series is being changed and this process has been going on in the past few years. Inflation, based in 1954 samples, is also being re-based.

As far as I am concerned inflation is not a problem. Globally the problem is deflation. It has already begun in Japan while Europe is on the brink of deflation. Inflation in Germany is 1per cent which is virtually negative and even in the US, inflation had been below 1 per cent for a long time.

Globally what is happening is that the Chinese shocked the world economy in terms of becoming a manufacturing arm of the world because of cheap labour.

This has resulted in western workers being unable to raise their wages. In the US, studies show that 1 per cent of the population has control of over 50 per cent of the total income of the country. People owning assets like shares, etc can grow their income exponentially unlike wage earners because they are being replaced by Chinese, Vietnamese, etc.

This is a global phenomenon; happens everywhere even in Singapore. The net effect of that for a country like Sri Lanka is that inflation becomes purely a domestic issue revolving around the control of money supply and the budget deficit. If these are controlled, inflation can be controlled.

Thus in the budget it is paramount that the 100 day programmes incentives are funded by revenue. As long as this happens, inflation is manageable.

Has the CB in recent times gone beyond its brief in either policy formulation or other issues? Has there been a politicisation of the CB?

All I can say is that in last year’s annual report there was a very clear praise of the Mattala airport, as one example, and such praise was perhaps a bit excessive. The Central Bank’s role is to be more objective… not gush about projects where the feasibility study had not been done.

From that point of view, the CB seems to have strayed from its role of being an objective advisor to the Government and the people of Sri Lanka.

But I wouldn’t say that the entire CB was corrupt and irredeemable. I don’t think the CB has lost its way – we just need a slight course correction to get back on track.

The issue is the balance of payments, particularly exports which hasn’t been properly looked at in the past 10 years. This has been one of the serious gaps in the policy framework. Many years ago, when free trade zones (FTZs) were built, they were filled up quickly. Today there are no new FTZs. Exports need a shot in the arm and this is the challenge for the next five years.

So how do we increase exports? There is a simple solution to this. Foreign investors need infrastructure and if we have zones, these will fill up. Ofcourse FTZs now are more complex than the old Katunayake and Biyagama zones. Now whole cities have to be built with its own power supply, housing, etc but it’s not difficult to raise money for such developments.

The Government is looking at a Western megapolis, which is the Prime Minister’s vision, from Negombo to Kalutara, as a region for about 10 million people. Just like an industrial trading hub. Unlike the port city, one needs to take a holistic view – railways, highways, etc. Japanese funding could be obtained for this.

For this kind of development, how many years are we looking at?

The Chinese can build a city for 10 million people in one year; I have seen it. This is why we need to keep our communication lines open with the Chinese. They have the expertise and the technology to do this. We are not burning our bridges with them. All that we are saying is that the port city is too small in the scheme of things. We need to think and look big and be the biggest megapolis in the Indian subcontinent.

The Indians will also join us. This is the kind of development we need rather than building casinos and a port city. That’s the vision of the current Government. And I think this will work.

How are the reserves holding? There is a view that the rupee was artificially kept high:

The CB has $8 billion in reserves which is equal to about five months of imports. The critical level for imports is under three months of imports. Thus we are way above that and comfortable for now.

The rupee is at a critical stage and the global market is very volatile. I have never before seen this kind of volatility in my entire career. Some currencies are yo-yoing around. We need to take a call whether we need to follow these trends.

I think Sri Lanka’s best strategy for the moment is keep the currency flexible but not to the point where it would endanger the entire financial stability of the country. Remember in addition to being an export economy, we also export labour. Remittances are a huge driver of the economy - $9 billion in a $65 billion economy which is huge.

Meddling with the exchange rate too much will affect the confidence of Sri Lankan expatriate workers who want to save some of the money to buy property. That is a factor which is independent of our export competitiveness.

On the export side, tea prices are likely to be affected by the Russian crisis where the rouble has collapsed, which means the demand for tea eases. However much we devalue the rupee, we won’t be able to recover the Russian market. Hopefully the Middle East markets will keep tea exports steady.

On garments, there could be an issue of competiveness but I would argue that the more successful niche like women’s lingerie for example is an inelastic and high value market and devaluing the rupee is not going to boost those exports.

Thus exchange rate flexibility has to be the last option; we have to preserve confidence. At the moment the markets are waiting for the budget and the parliamentary election in June, and in that situation you need an anchor and the currency plays that role.

On markets:

We should enter into a FTA with the US as the bulk of our markets are the US and Europe.

Is there a need for an IMF facility with the debt burden rising?

Right now there is no need for an IMF facility. But if the external situation, which is not too bad now, worsens after the June elections then we may need some kind of IMF support. The IMF is very supportive and a routine IMF mission is due here in end February.

When you took over, were you facing a daunting task of putting things right?

It’s not difficult. I started my career in the CB in 1983 (and left in 1994). Most of my batch-mates are here as deputy governors and they welcomed me very warmly. There’s nothing wrong in the bank; all we need is to make it more regulatory-oriented and less commercially involved.