“Sri Lanka must make its economy an open, globalised and competitive economy in South Asia, integrated into a global value chain in the Indian Ocean. In the meantime, Sri Lanka needs to create a strong free trade centred on mercantile facilities.”
He made these remarks delivering the keynote address on the theme ‘A New Global Economic Strategy for Sri Lanka’ at the Economic Summit 2015 yesterday in Colombo.
Sharing Singaporean practices, he said: “One of the primary rationales why Singapore is a success today was because they kept it simple. Simplicity is the key, ‘get the basics right’ – do not over complicate it.”
Six key points
Elaborating on six points what Sri Lanka should be aiming at, Dr. Sally said that it was imperative to be ambitious to double country’s trade targets.
“Firstly, it is important to maintain trade over 100% of GDP. Try to double the trade/GDP balance by 2020-2025. Secondly, Sri Lanka should focus on three key export markets: US, EU and India, while maintaining healthy trade connections with ASEAN, China and Far East Asia. Thirdly to increase FDI to 5% of GDP by 2020 and fourthly, focusing on GVCs beyond garments – especially services and logistic hub. Fifthly, Sri Lanka needs to work hard to get into the top 50 bracket in the Ease of Doing Business ranking by 2020 and to the top 25 by 2025. Lastly, continuous improvements and international benchmarking, especially with the East Asian countries and top five Indian states is necessary.”
Noting that the implication of CESS on key exports products like tea and rubber was one of the most ‘stupidnomics’ he had ever seen said: “This kind of action creates all kinds of distractions to markets. Sri Lanka should bonfire para-tariffs and non-tariffs.”
In fact he suggested a uniform tariff of 5% on industrial goods by 2020, which would benefit the businesses by allowing them to carry out their cost of operations at low as possible.
Highlighting possible export markets and trade negotiations Dr. Sally suggested that Sri Lanka must prioritise its unilateral form.
Sri Lanka as a nation needs to trade with the world to build a strong economy. With a population of 21 million, it is too small to reach economic prosperity by trading internally. Thus, it is necessary that the country trades and expands itself to the outside world, he noted.
Speaking in favour of FTAs, he suggested that Sri Lanka apply to join a TPP with the US, while entering into a FTA with EU and ASEAN starting with Singapore.
He further advised completing the CEPA with China and India, especially to deepen links with South Indian markets.
Dr. Sally also proposed a new Ministry of International Trade and Investment to lead and coordinate global economic policy with a right minister.
York Street Partners Senior Advisor Eric Rajendra stated the comment about an International Trade Ministry was a great idea, but getting another ministry would make things worse. “Maybe rationalising the existing ministries would help not to confuse the mandates. These things confuse investors. The BOI approach has not addressed this issue.”
Call for market-friendly environment
NDB Bank Treasury Vice President Niran Mahawatte pointed out that in the current system we manage a float where market forces determine the prices. “These were highly-regulated and intervened for extended time, where the expected actual market rate really varies from the official rates. These large misalignments can generate and produce wrong signals to the markets and confuse us sometimes. So, what we ideally preserve is that to have a more of a market-friendly environment and also a limited intervention in the same time.”
Sri Lanka needs to play very hard
Economist Anushka Wijesinha noted that over the last decade something happened which led us to becoming far less open to the global economy than we have ever been. The orientation of the Sri Lankan economy became more tilted and more towards domestic economy, less towards the export economy, more towards public investment and less towards private sector dynamism.
“What’s positive for us is our strategic location, competitive companies, strong basic HR, but the reality is that Sri Lanka is not only the hotspot on the market. We are in a very dynamic region, surrounded by other very dynamic countries that attract and do interesting things. In that sense we need to remember that we are not in the hotspot and we need to play very hard.
“Secondly, Sri Lankan companies have to create a more level playing field at home and open up the playing field for them overseas. Much of our foreign policy during the past decade or more has been unfortunately preoccupied with issues like human rights and governance. Now that has to be reoriented. Future trade visits needs to have very strong trade components.
“Thirdly, let’s operationalise the hard infrastructure that was done, especially the Hambantota Port and Airport. Finally, Sri Lanka needs to promote sectors. The future may not be a recognisable set of sectors, more with individual Sri Lankan firms going global. There are many competent and competitive firms,” he asserted.
Social market economy
Agreeing with Sally’s views on having trade that is 100% of GDP, Policy Planning and Economic Affairs Deputy Minister Dr. Harsha de Silva said: “I want to go beyond that, I want to see exports more than 100% of GDP. We are very precise on what we want to create in our knowledge-based, highly-competitive social market economy. That’s where we are going to prioritise in the next five years.”
Q: Why are you protecting domestic industries and import substitutions, distorting the resources of exporters?
Dr. Sally: You need your imports for processing your exports. So how can you increase your exports while limiting your imports? There are many other competitive countries that are willing to grab these businesses. What countries should be looking now is not to do a whole value chain domestically, but to try and find niches along the value chain where you can perform specific tasks. Much of them will be intermediate products and the way public policy can help there is not to target particular firms and sectors because we can’t predict how the market is going to evolve in the future, but to provide an enabling environment. Education and skills in Sri Lanka and elsewhere needs a much bigger private sector component, with a lot more competition choice for ordinary Sri Lankans.
Q: Why is it so hard to attract foreign talent to Sri Lanka like other successful economies like Singapore, Malaysia, and Hong Kong?
Dr. de Silva: We have foreign talent right here. Dr. Razeen is going to head the Institute of Policy Studies (IPS) and our Central Bank Governor who’s a foreigner and both of them will soon get their dual citizenship. We should look for the best HR; we have so many Sri Lankans working overseas, we can attract them. Economic nationalism must be reinterpreted by creating value here. Before we look at non-Sri Lankans, we can look at former Sri Lankans who want to come back and play the game right here.
Q: What’s your comment on politicisation of the Central Bank?
Dr. de Silva: The Central Bank is no longer under the Finance Ministry; that was a step in taking the Central Bank out of the grip of political masters. We want to create an independent Central Bank. It must take decisions on its own to ensure that there is price and financial market stability which helps the sustainable growth of Sri Lanka. Our plan is to provide the Central Bank and EPF that independence. We will create a new entity that will join the two funds, the EPF and ETF, which will be run by those appointed by the Constitutional Council that is accountable to Parliament. There really is a whole lot of issues that are connected, particularly conflict of interest.
Q: Intervening in currency markets; how is it helping you to pay your foreign debts?
Dr. Sally: I agree with Dr. Harsha for depoliticising the Central Bank. The world is going in the wrong direction in my view because macroeconomic policies in general including monetary policy since the crisis is about more discursion which is more about politicisation and less rules. Rules, whether it’s going to be exchange oriented target or inflation target are much preferable to discursion. Intervening in the currency markets in the short-term may or may not have a rationale but it probably doesn’t have medium to long-term rationale.
Q: The panel spoke about increasing global trade. However, closed capital accounts and restrictions is a hindrance to this. What’s your long-term policy on closed capital accounts?
Dr. Sally: One should have complete openness in the short, medium and long-term, with the exception of maybe a few sectors on negative financial security reasons for FDIs for long-term investments and for longer-term portfolio investments as well. There the capital account should be open.
Q: We have seen that exports to the EU are decreasing in 2015, especially apparel. What would be the reasons and back up plans to face this challenge?
Anushka Wijesinha: It is unlikely that we will see a fairly strong recovery in the US market; in the EU we see renewing of stresses coming into the financial system and then spilling over. In the next few years Sri Lankan apparel will be hit further as unemployment in the EU is extremely high. Thus, in the next decade the emerging consumers in the EU are not going to be as prosperous as now. I do agree with Dr. Sally that these are some of the biggest markets, but I would say it’s good to focus more on the US than the EU. I also think that focusing on some of the East Asian markets will bear fruit, particularly considering the growing middle class.
Q: How Sri Lanka can improve the ease of doing business in the top 50 by 2020?
Rajendra: It’s about how you deal with multiple ministries and openness of the families in this country also needs to increase. The business community also has to be open in ease of doing business.
Pix by Upul Abayasekara