What has been the economic development in the last couple of years in Sri Lanka and could you give us some details of the economic situation at the present?
During the last few years the economy has gone through a number of reform programmes, the country has gone through a liberalization and deregulation process and the international trade and tariff policies have been substantially reformed. Public enterprises have been restructured. The tax system has been modernized. Private sector has been encouraged into infrastructure development activities. Government has attempted to consolidate the macro economic situation through financial sector reforms, fiscal reforms and regulatory changes. As a result the economy has become much more resilient to various shocks and had maintained a healthy growth of over 5% during the last six to seven years. As of now the economy is confronted with a few external shocks, particularly the petroleum price hike. Consequent to Sri Lanka having to import its entire requirement of fuel, there is a huge external pressure on the balance of payment. The high budget deficit is due to the ongoing war which is also a cause for the current macro economic difficulty.
The government has taken corrective measures by adopting price corrections and reconsolidating the macro economic situation. The country has successfully entered into an IMF program to stabilize the current situation and to consolidate the growth process.
There is a privatization program which companies have gone through in the last couple of years ,and moreover that are plans for the future to include other companies as well in this privatization program. Can you tell us what are the companies that will be privatized this year and the next?
The privatization programme basically falls into two very important categories. The first stage was the privatization of the manufacturing enterprises prior to 1995. We then entered into the second category which was a far more ambitious program. The privatization of the plantation industry, telecommunications, Aviation and the Port. Now we are embarking onto a second generation reform program, where key sectors have to be restructured before moving on to other transactions. As a result, Sri Lanka is now in the stage of restructuring and re-engineering some of the key sectors such as power and electricity, petroleum, water and the Port. Large infrastructure for urban development is also being considered. Hence next two to three years will be concentrated to consolidate an environment conducive for increased private sector participation.
We recently privatized the National Insurance Corporation, the Prima Flour Mill and liberalized the importation and distribution of flour. These are some of the major transactions we concluded during the last 6 months. We are also embarking on some of the residual assets which have to be disposed of, like shares in hotels and the remaining shares in the Colombo Gas Company. We have to commercialize, restructure and re-engineer companies that are of a static nature. The two state banks are being restructured. The Government has made a clear decision that they will not be privatized. They will be restructured with a private Management in place. The Boards have been reformulated by bringing in top private sector leaders. A new management team has been appointed to work closely with the staff. We are also working closely to further reduce the Government ownership in Sri Lanka Telecom. There is no list setting out in particular, which companies would be privatized in the next year or two. When the environment is conducive, we will go ahead with these transactions.
Are you planning to sell more shares to the same investor?
Not necessarily. We are interested in encouraging local investors as well. If major stakeholders wish to further invest, we negotiate with them. We do marketing to get more investors.With this privatization program obviously goes the attraction of the Foreign Direct Investment hand in hand, and this is one of our objectives as well, to attract more investors into the country, and to improve the image of Sri Lanka and the investment climate.
Now as far as the investment climate is concerned how would you describe it? What are the major advantages for foreign investors here and what are the gray areas the Government will have to work harder on to make Sri Lanka more attractive?
Sri Lanka has gone through almost twenty years of creating an environment conducive for foreign investment. The government has recognized that foreign investment is a part of the overall development strategy. Government has made a considerable effort to open more opportunities to the private sector. It has also given recognition to build infrastructure as early as possible to remove bottlenecks for private sector investment in a wide spectrum of activities. In fact compared with what it was years ago, many activities are now in the hands of the private sector. Economic activities have been further rationalized, for example the insurance and finance related activities have been liberalized. Earlier foreign investment in banking was restricted to less than 50% now it has been opened up to 60%. Telecommunications and many services are open for private investments. Building infrastructure is now a private sector activity. The tax regime has been made attractive to foreign investors. The BOI has basically concentrated on the promotion of foreign private investment. Compared to several years ago when foreign investment took place in the manufacturing sector of garments, ceramics and a few other products, today the private sector is in a wide range of activities such as the tourism industry, various services such as telecom, port, electricity & insurance. Thus a huge diversified portfolio is now open to foreign investors.
The BOI plays a very prominent role in the promotion of foreign investment in Sri Lanka. Can you tell us what is the focus of the government in terms of sectors for the next year? In the past there was the garment sector and other traditional sectors, but now the government wishes to diversify more, for example exploring the IT sector. What are the most promising sectors for foreign investors and what are you focusing on in terms of attracting those particular investors?
Of course, the private sector is evolving since a whole range of areas are open. For instance the Cement Industry that was earlier a trust industry has become very competitive, with huge foreign participation. There are three or four large world-class cement manufacturers operating and even planning for massive expansions here. They are taking a long-term view of the North East settlement. Now they are exploring the possibility of moving into new avenues of manufacturing building material.
With the Indo-Lanka free trade agreement entering into the second year, a lot of investment opportunities being explored there. Sri Lanka has emerged as a leading manufacturer for various up markets and is now moving into ancillary products in a bigger way. There are new investment avenues in the petroleum sector because the government is planning to liberalize petroleum imports. There are major investment opportunities in the power sector as well. Government is inviting BOO / BOT projects into those areas. There is also wider scope for tourism with the new tourist development strategy which is based on bio diversity of Sri Lanka as well as its cultural heritage, art, crafts etc. These are combined products which are being explored for marketing purposes in place of the old marketing concept of beach resorts. So there is diversification in the tourism sector. The environment and plantation sectors are beginning to attract new opportunities because of the environmental priorities in the country. Investment on forestry is another aspect. Even in the Telecommunications sector we are planning to permit another international gateway. Combined licenses are now being offered in place of separate licenses for mobile operations and fixed line operations Many inquiries have been made with regard to infrastructure development as well. These are the new areas for foreign investment.
With new licenses offered to mobile operators don't you think that the market is already saturated?
No. It is time for consolidation. What market tells us is that a combined product will enable them to consolidate and expand rapidly, since the business community's demand for communication services is very rapidly growing. We see a community of small retail operators in various places. Now they have graduated to enter into the next stage with an international facility, a mobile facility as well as a fixed line operation. The country is still functioning on one fixed line operator and one international gateway.
| Regarding the Free Trade Agreement with India, it seems that a lot of foreign investors see it as a big opportunity and as a gateway to the subcontinent. Nevertheless, there are threats as well as opportunities, what is your opinion and what are your expectations?
Sri Lanka in the South Asian region is based in a very advantageous position. Not only economically but it also possesses the infrastructure advantage as well as the human resource aspect and geographical location. All these are in favor of our country. Whatever problems are confronted with the Indo-Lanka trade agreement, in the long term it is seen as an entry into the Indian Market, as this is a service oriented economy. Even now our economy is far more diverse than Singapore or Hong Kong, because we have 20% agriculture, 20% industry and the balance 60% comprising of a wide range of services. The potential in the agriculture sector is very large and there are new investment opportunities in the private sector to move on to these agricultural activities. Given the interest in the nature friendly, health conscious consumption pattern emerging, we see that Sri Lanka definitely has a huge comparative advantage when exploring the possibilities under the Indo-Lanka free trade agreement. Right now we are in progress with Sri Lanka-Pakistan trading arrangements, as Pakistan has a segmented market on certain products which India is not exploring. So it is basically a triangular operation, which we are trying to build in this region.
In addition, Sri Lanka has also entered into another big market through our trading arrangement with the EEU executing duty free access between Sri Lanka and the EEU market regarding the entire textile industry. This has opened new opportunities to shift away from the quota market, where 40% of our garments are moving into non-quota markets. This year we see that with the recession in the US markets we are shifting substantially towards the European markets. Opportunities for market access and enhanced modern telecommunications facilities should provide the means for a rapid expansion in investment growth.
It seems that your economic future depends very much on the peace process in the country. What are your future personal expectations and where do you see the country in three years time?
Our future expectations since its liberalization process of more than twenty years, 1978 to 2001, you might ask us where the country stands. During that period except for two or three years we have been confronted with this civil conflict. Nevertheless what one can see here is a remarkable resilience since the country was confronted even with several external shocks. In the recent history we saw the Mexican Crisis throwing its adverse effects on the region. The Ruble crisis and the South East Asian crisis also affected. The current petroleum crisis is another major hit. All these shocks came one after the other at eighteen months to two-year intervals. Even the petroleum crisis we have seen occurring every ten years. Only the magnitude and the impact have been different. What we see is that reforms in the country have built up remarkable resilience to face such situations. As a result, despite all these difficulties, despite the very high fiscal imbalance and even despite the very high budget deficit the country has maintained a 5% growth. That's a very important factor. During that period the country has embarked on a massive private sector development programme. Compared to several years ago the economy has begun to diversify.
The policy makers have responded fairly well despite political difficulties posed to some of these measures. Corrective measures have been taken and President Kumarantunge has given the much needed leadership not only on the peace front but also on the economic front. She believes that not only does the country have to restore peace but even if peace is restored, unless there are socio-economic reforms in the country you cannot achieve its development objectives. So her vision, which has been articulated and now been placed before the public and has been integrated into the national budget is called Vision 2010. This strategy envisages a more prosperous economy on a rapid growth path. We work on two scenarios. One scenario is the peace scenario and this scenario we count as a bonus dividend, which could bring us to a massive boom at least for seven or eight years by North East reconstruction and the revival of the South. Even if there are some delays in that process, the economic reforms will enable to maintain a 6% growth rate in the country since new investment in infrastructure would generates vast opportunities. The economy has gained much maturity. It runs on it's own resilience. We think that Sri Lanka will at the time that you are talking about, cross the thresh-hold per capita income level. We will be in the period of middle-income status. The country would be more in the capital market rather than in the donor community and would be more business oriented rather than being a dependant economy. Sri Lanka will be one of those countries that will graduate to a middle-income status from the Asian region.
So that is the strength of this country and all the necessary policy reforms have taken place. Of course we will have to enter into second-generation reforms. These are now taking place and the private sector is encouraged to move in that direction.
As you know our readers are top management leaders in the world and they are always interested in the profile of other readers in other countries. I would like to ask you if you could give us a little background information on yourself, being the Secretary to the Minister of Finance, Secretary to the Treasury and Chairman of PERC. And what will be your last message to our readers who are potential investors in Sri Lanka?
My career started at the Central Bank after graduating from the University of Colombo. I received a PhD at the Boston University. Prior to this I got my Masters Degree at William's College in the USA. Thereafter, I came back and worked at the Central Bank in the research field, on public finance, monetary policy, macro-economy and international trade. I joined the Finance Ministry as an economic adviser in addition to working at the Central Bank. . Subsequently I joined as the Director General of Fiscal Policy and Economic Affairs. Then I became Deputy Secretary to the Treasury and held that post for a period of four years. Thereafter I was appointed Secretary, Finance in 1999. I have also been Chairman of PERC since 1997. I have enjoyed the opportunity of contributing towards economic reforms in the country. That's the satisfaction I have.
The message I can give to the investor community is that Sri Lanka has made considerable progress in creating an investor friendly environment. It has begun an ambitious reform program; the political commitment at the highest level has emerged. The country is lead by a reform leader who takes a long-term view. As a result there is a firm commitment at political level. The consensus building has taken place. Although Sri Lanka has had a few bombs going off in various places due to the current conflict, these are problems confronted by any developing country, depending on the nature of the problem.
However, the country has maintained its democratic values, remains committed to human rights, democratic freedom, media freedom and basic cultural values. The identity is being preserved, the opportunities are being recognized. The political leadership has recognized the need to modernize Sri Lanka while preserving democratic values. Sri Lanka will project itself to the world as one of few developing countries that has prospered with democratic values.
We see that many countries are managed under authoritative regimes during the period of rapid development and then begin the process of democratizing and institutional building. We however practice the western democratic style. In that context we have a nice blend in Sri Lanka, that is democracy and growth, where as growth first and democracy later is another model. I am sure that development and political economists will articulate and people like you, three years from now will have a success story of a different model. The investor community who have come here over the last ten or fifteen years have witnessed this. If a new investor speaks to the investors who are already here, they would testify to this. That is why increased retained investments from foreign investors take place in this country.
If you speak to the BOI, although our measured foreign investment has not gone up drastically, and have maintained around 200 Million Dollar level their retained investments in Sri Lanka has risen. As a result capital out flow from their investment has not taken place. In my view, that should be counted as a plus factor. It is not the first found impact that they created but they continue to expand. In fact it is a massive expansion from the investor community that BOI has developed. We have moved on to a floating exchange rate regime. We have not seen the shocks that other countries have experienced. With two months reserves we have been able to move on to a reasonably stable exchange rate arrangement in this country.
The entire BOI does not have that much capital control. So I think the new investors should speak with the investor community, which is already here, and assess the investment climate and the peace bonus that they may enjoy in near future in Sri Lanka. This is the real opportunity here. So basically we see that the emerging sector development strategies will give tremendous opportunities to fairly stable, high return investments in this country.
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