New Finance Minister has a Herculean

task ahead; he will win only if he

moves with foresight

New Finance Minister Mangala Samaraweera officially

assuming duties at the ministry Pic by Pradeep
Pathirana

Monday, 29 May 2017

Promise to continue with economic reform program

The new Minister of Finance, Mangala Samaraweera, who

assumed office at the ministry without much fanfare, has testified
to his humbleness when he made his maiden speech in
Parliament. He had said that the shoes he had to wear now had
been much too big for him to wear, a testament to the
seriousness of the job at hand (available at:
http://www.ft.lk/article/617417/Mangala-promises-to-rebuild-
economy--meet-development-goals ).

Yet he had given a solemn undertaking that he would commit

himself to implement the economic reforms needed to save the
country from the debt trap it is in. He had reiterated, quite
correctly, that it would be the private sector that would propel the
economy and that would be the focus of his policy.
NM Perera as a guiding light
Samaraweera had also mentioned the names of some of his
predecessors who, according to him, had had high political
stature, compared to his own naivety in the field as he had
humbly admitted. Of the names he had mentioned, not all of
them had been great ministers of finance with respect to self-
discipline or foresight. Like any ordinary lay person, they were
also not free from human frailties and, therefore, he should not
seek to emulate all of them.
However, of them, Dr N.M. Perera, known as NM, who held the
portfolio from 1970 to 1975, should serve as a guiding light for
him when he has to deal with his main economic advisor, the
Central Bank.
NM wanted CB reports to be impartial and objective
As this writer had mentioned in a previous article in this series
(available at: http://www.ft.lk/article/614940/CB-Annual-Report-
2016--Bold-in-critical-analysis-and-proactive-in-policy-
recommendations), the job of the Central Bank has been to give
its advice to the Government impartially and objectively, taking
an apolitical stance. NM had highly valued it as he had indicated
to the senior staff of the bank when he had addressed them at a
function held in 1971.
According to a report in the Ceylon Daily News reproduced by the
bank in its 60th Anniversary Commemorative Volume, NM was
reported to have said that the bank should make independent
reports on economic subjects to the government and not reports
(that) merely suit the political complexion of the government in
power and he would value reports (of the bank) made
dispassionately and objectively.
Thus, a Finance Minister with foresight and wisdom should not get
offended when the Central Bank makes a critical analysis of the
prevailing state of the economy. Indeed, he should welcome such
critical analyses because they allow his Government to take
remedial measures before the situation becomes too critical to
handle.
NM, the self-disciplined politician, respected CBs position
There had been two other occasions where NM had demonstrated
his self-discipline as a politician of stature when he dealt with the
Central Bank. This writer recalls that in 1973, NMs private
secretary, ignoring the protocol where the Governor of the Central
Bank should be addressed only by the Minister, had sent a letter
to Governor H.E. Tennakoon requesting him to submit the lists of
candidates to be appointed to the bank for the Ministers
approval.
Governor Tennakoon, the senior-most civil servant that he was,
got his Director of Establishments to write back to him that the
Monetary Law Act did not permit the Minister to make such
approvals and that matter should be brought to the notice of the
Minister. NM did not bargain for that information after that.
The other occasion was when NM had sent a directive to the
Central Bank not to pay a bonus to employees on the grounds
that itwas not a profit-making institution. His claim that the bank
was not a profit-making institution was correct; yet what was paid
to Central Bank employees was not a bonus based on profits but
an incentive payment called Annual Special Payment linked to
their attendance. Therefore, Governor Tennakoon ignored NMs
directive and went ahead with making the payment to employees.
After it was clarified to him, NM did not make a fuss about it.
Hence, NM had set some precedents for Samaraweera to follow as
a Minister of Finance.
Samaraweera has a track record of introducing policy
reforms
Samaraweera says that he is new to the subject of finance. But
that position is not quite correct. He had functioned as the Deputy
Minister of Finance for three years during the Presidency of
Chandrika Bandaranaike Kumaratunga from 1998-2001.

Prior to that, he had proved himself as a bold reformer by

privatising Sri Lanka Telecom and thereby paving the way for
modernising the countrys telecommunication system. With that,
the long waiting lists for landlines which had been the curse of all
telephone users prior to 1996 have been made things of the past.
He met with fierce opposition when he embarked on the project
from all quarters: his own Cabinet colleagues, opposition from the
UNP, trade unions and the media.
Yet, he was able to successfully manage them and reach his final
goal. With that track record behind him, the country can place
confidence in him for doing a successful job when he announced
in Parliament that he would commit himself to implementing the
needed economic reforms.
Without economic reforms Sri Lanka has no future and would be
destined to remain forever a stagnating agro-based economy with
low productivity, poor human capital and inferior technology.

Central Bank reports today are candid and free from political bias
Hence, Samaraweera has a Herculean task ahead to rescue the
economy from the depths to which it has fallen. Despite the
claims made by his immediate predecessor, Minister Ravi
Karunanayake, that he had rescued the country from the
economic depths, Sri Lankas economy today is in a sorrier state
than before. Samaraweera has to read only the first chapter of
the Central Bank Annual Report for 2016 (available at:
http://www.cbsl.gov.lk/pics_n_docs/10_pub/_docs/efr/annual_repor
t/AR2016/English/content.htm) and the recent press statement of
the bank on the performance of the external sector of the country
during the first two months (available at:
http://www.cbsl.gov.lk/pics_n_docs/02_prs/_docs/press/press_2017
0525e.pdf ) to gain a sense of the real situation.
A frank admission of the sorry state of the economy
The first chapter in AR 2016 starts with a candid admission of the
poor performance of the economy during 2016 on all fronts.

Growth has slowed down from 4.8% in 2015 to 4.4% in 2016; per
capita income which has increased in rupee terms from Rs.
522,355 to Rs. 558,363 has fallen in dollar terms from $ 3,843 to
$ 3,835 due to the depreciation of the rupee; inflation, measured
in terms of the Colombo Consumers Price Index, has accelerated
from 2.2% in 2015 to 4% in 2016; to make matters worse, core
inflation, which is free from weather or price control effects on
food items and, therefore, measures the level of the money
aggregate demand is on the increase; though the budget deficit
has been contained at 5.4% of GDP in 2016, the central
government debt has increased from 78% of GDP in the previous
year to 79% of GDP in 2015; exports have declined, the trade
deficit has expanded and the balance of payments has recorded a
deficit for the second consecutive year; the rupee has been under
pressure for depreciation, while foreign reserves have declined
from $ 7.3 billion at end-2015 to $ 6 billion at end-2016.
Foreign reserve build-up via borrowed money
There had been further erosion of foreign reserves during the first
four months of 2017, bringing the gross amount of official
reserves to $ 5 billion as at the end of April 2017. After raising $
1.5 billion through the issue of sovereign bonds in early May, the
Central Bank has been able to add about a billion to reserves, but
Samaraweera should not allow himself to be misguided by such
reserve build-ups through borrowed funds. They go against
Samaraweeras own plan to rescue the country from the present
debt trap.
Woeful state of Sri Lankas export performance
Sri Lankas exports have been falling since January 2015. This has
been repeated in the first two months of 2017 according to the
latest press statement of the bank on the countrys external
sector performance. Accordingly, exports have fallen by nearly
7% during January-February 2017 compared to the corresponding
two months in 2016.
To make matters worse, imports have increased by 13%, causing
the trade deficit to expand further. The new trade deficit figures
are alarming and if they continue to persist during the balance
part of the year, it will reach a staggering level of over $ 10 billion
in 2017 as against a trade deficit of $ 9 billion in 2016.
In the first two months of 2017, the overall deficit in the balance
of payments had amounted to $ 258 million. The country could
eliminate this deficit only by making additional foreign borrowings
but they would exacerbate the present external debt build-up.
Sri Lankas past growth has been below expected levels
This is bad news that points to a worsened macroeconomic crisis
in the country. Prime Minister Ranil Wickremesinghe, in the
economic policy statement he presented to Parliament in October
2016, opined that Sri Lanka needs to have a minimum annual
economic growth of 7% in the next 30-year period. If Sri Lanka
succeeds in maintaining this growth rate, it will enable the
country to join the rich country club by 2045, within a single
generation. This is an ambitious target since the annual growth
which Sri Lanka has maintained over the entire post-
independence period has been around 4.4% on average.
As Graph I shows, the annual growth has been highly volatile in
the past and the country has been able to exceed the minimum
required rate of 7% only on five occasions. Even then, that had
been a way apart from each other.
In the medium term up to 2020, as Graph II has shown, the best
predictions made with respect to growth have been around 5%
which is far below this minimum required rate.
The longer the country is trapped in low growth, the more difficult
for it to reach its goal of becoming a rich country within a single
generation. Hence, Samaraweera has to act at double speed,
coordinating his work with other Government agencies and the
private sector, to push the economy to a high-growth path and
sustain it for a long 30 years.
Policies should be free from short-term political
expediency
Countries that have faced worse economic crises have come out
of them by using prudential policy packages aiming at future
prosperity rather than short-term political expediency. For long
term economic prosperity, Sri Lanka has to make it easier for
people to do business, improve its competitiveness, invest heavily
in both human and physical infrastructure, improve productivity
and efficiency in government services and have access to foreign
markets.
Reforms are a must
All these require Sri Lanka to introduce economic reforms but
reforms are painful and costly. Hence, in the past, all Finance
Ministers, including Samaraweeras immediate predecessor,
chose the easy path of seeking short-term political expediency
sacrificing long-term growth objectives. Now Samaraweera has to
make this hard choice which is politically unpalatable but
necessary for long-term prosperity.
All financial institutions should be returned to Ministry of
Finance
An important requirement for Samaraweera to do this job has
been that all financial institutions should be correctly placed
under him. Thus, institutions which have been listed under
different ministries but legitimately should come within the
Ministry of Finance should be returned to that Ministry.
The financial institutions involved are the Central Bank, state
banks, Securities and Exchange Commission, Employees Trust
Fund and the Sri Lanka Insurance Corporation. Without them
under him, it is unthinkable that he would be able to introduce the
reforms which the Government expects him to do.
Then, he and the Governor of the Central Bank should speak the
same language with respect to macroeconomic policy and
economic policy reforms.
A grave mistake committed by his immediate predecessor in this
regard was the attack on the Governor and the senior officers of
the bank in public, thereby undermining their position. Such
attacks may be appealing to the local voter-base but will not be
taken kindly by those outside Sri Lanka who have an interest in
investing in the country.

Use the talent pool within the Central Bank

A Finance Minister stands to gain if he works closely with the
Central Bank. The Central Bank has a vast build-up of human
talents and skills and those skills should be effectively used by
Samaraweera to design and implement the economic policy
reform program.
This writer recalls that during the previous Ranil Wickremesinghe
administration of 2002-2004, the Central Bank was at the
forefront of the economic policy reform program implemented by
the Government. Thus, Samaraweera should use the resources
within his reach in the first instance and look for resources from
external sources only to fill the gaps.
The required armoury of a Finance Minister
Samaraweeras success as Finance Minister in bringing prosperity
to Sri Lanka will, therefore, depend on his ability to move forward
with foresight, self-restraint and self-discipline.
(W.A. Wijewardena, a former Deputy Governor of the
Central Bank of Sri Lanka, can be reached at
waw1949@gmail.com).
Posted by Thavam