By Mangala Samaraweera –

This year, the Summit is of greater significance because it is held on the eve of a decisive Presidential Election – an Election which will seal the fate of our country for many decades to come. In this context, I am glad that the Chamber picked a future-oriented theme this year – “Recalibration of Sri Lanka’s Economic Trajectory”. If we are to recalibrate our future it is essential that we learn from the mistakes of the past. Hence the theme of my speech is “Three Lessons From the Past to Recalibrate our Future”.

Sri Lanka, or Ceylon as our country was called when we achieved independence, was the model Commonwealth country. Our per capita GDP was well above that of our South-East-Asian neighbors. We had an excellent civil service, an extensive school network, and universities of high quality. Our literacy rate was nearly 60 percent. In fact, an editorial in a British newspaper on the day of Independence predicted a bright future for Sri Lanka as a ‘potential Switzerland of the East’.

Remarks by  Minister of Finance Mangala Samaraweera -Ceylon Chamber of Commerce Economic Summit -Tuesday 17 September 2019:

Prime Minister,

Chairman of the Ceylon Chamber of Commerce, Mr. Hans Wijayasuriya,

Secretary-General of the Ceylon Chamber, Mrs. Dhara Wijethilake

Ladies and Gentlemen,

I am delighted to be here at the 19th Sri Lanka Economic Summit. The Summit – an important forum for public dialogue on pivotal national issues – has become a fixture of Sri Lanka’s business, economic and policy-making calendar. 

This year, the Summit is of greater significance because it is held on the eve of a decisive Presidential Election – an Election which will seal the fate of our country for many decades to come. In this context, I am glad that the Chamber picked a future-oriented theme this year – “Recalibration of Sri Lanka’s Economic Trajectory”. If we are to recalibrate our future it is essential that we learn from the mistakes of the past. Hence the theme of my speech is “Three Lessons From the Past to Recalibrate our Future”. 

Sri Lanka, or Ceylon as our country was called when we achieved independence, was the model Commonwealth country. Our per capita GDP was well above that of our South-East-Asian neighbors. We had an excellent civil service, an extensive school network, and universities of high quality. Our literacy rate was nearly 60 percent. In fact, an editorial in a British newspaper on the day of Independence predicted a bright future for Sri Lanka as a ‘potential Switzerland of the East’.

In 1977, as the first country to embrace a market economy in the region, Sri Lanka was ready for an economic take-off.

In those heady years, Sri Lanka resembled the Asian Tigers in their first stage of development. Sri Lanka’s first manufacturing export – garments – were hitting world markets. Tens-of-thousands of jobs were created and the trickle of wealth into the village became a river. 

1983 was supposed to be the real take-off year. The transition from garments to electronics is what truly set the Asian Tigers up for success. And Sri Lanka was on the verge of that transition. Motorola and Harris Corporation were building semi-conductor factories in the Katunayake Free Trade Zone by early 1983. Sony, Sanyo and other Japanese companies planning to invest in Sri Lanka. However, just as the Japanese delegation arrived in Colombo, the 1983 riots took place. Decades of communal intolerance finally culminated in an orgy of violence which engulfed our nation in a bitter and brutal war for almost 30 years. Motorola’s manager was killed in the riots and construction stopped. The Motorola factory moved to Malaysia. And unfortunately for Sri Lanka, it is Penang, and not Katunayake, that is a micro-processor manufacturing capital of the world today.

 In recalibrating our future, Ladies and Gentlemen, that is lesson number one. Reconciliation is an absolute necessity for economic development. There is no way of harnessing our potential as a modern, stable, prosperous nation, except to celebrate the diversity of our country as a multi-ethnic, multi-religious and multi-lingual nation. 

The defeat of the LTTE in 2009 could well have been a new beginning for our long-suffering country. But instead of trying to win the peace, the government of the day, re-enacting scenes from the ‘Mahavamsa’, embarked on a project to establish autocratic family rule. While the grateful majority reveled in ‘patriotic fervour’, democratic institutions and other checks and balances were systematically dismantled. The end-of-presidential term limits, the impeachment of the Chief Justice for not doing the Family’s bidding and white-van culture meant that there was no security or certainty for anyone.

 Some people with short memories say they want decisive leadership. That is good. Sri Lanka needs decisive leaders. But it certainly cannot realize its economic objectives with leaders who decisively sack the judiciary, decisively murder, decisively undermine the rule of law and cultivate a culture of impunity, decisively ignore procurement procedures for their own benefit, and decisively expropriate private investment. The previous regime’s naked power-grab – by stabbing the rule of law in the back – was a key reason for the failure of the promised post-war investment boom to materialize. Foreign and domestic businesses decided that their factories and investments would be safer in Ethiopia, Bangladesh or Vietnam.

That is lesson two. There can never be sustainable economic development without democracy and the rule of law.

Historically, Sri Lanka prospered when it was open to the world. The splendour of the Polonnaruwa civilization, for example, was as much built on trade with lands beyond our shores in East and West, as it was on our hydraulic civilization. Archaeological and literary evidence shows that Sri Lanka was always a welcoming multi-ethnic, multi-religious trading country open to the world, until colonial monopolists – like the VOC and East India Company –cut us off from the seas and closed our minds, forcing our imagination and our economy inward. 

More recently, the economically isolationist policies of the largely well-intentioned Sirima Bandaranaike led United Front government resulted in calamity. I am sure the era of queues and rationing has not slipped from the memories of our people. What is less well-known is that the Rajapaksa regime took us closer to that failed economic model. 

According to the World Bank, Sri Lanka’s economic openness, which had increased in the 1980s and1990s, took a turn for the worse after 2005. By 2015, mainly as a result of rising para-tariffs, Sri Lanka was as economically closed as it was in the 1970s. Industrial exports fell from 20.3 percent of GDP in 2005 to 9.4 percent in 2015.

 Between 2005 and 2015, Sri Lanka did not sign a single FTA. Today Sri Lanka has six FTAs. But we are still far behind our competitors: Thailand has 14, Malaysia 17, South Korea 16 and Singapore 25. This is one important reason for our failure to diversify exports beyond tea and apparel. We continue to export old products to old markets.  

The previous regime’s isolationist and confrontational foreign policy did not help. By 2015, we were a pariah state. The EU withdrew GSP+ and had also imposed a ban on exporting fish to the EU. The UN Human Rights Council found that we were violating many of our own voluntary commitments. We had limited access to IMF and World Bank funds. Our military had no access to joint exercises and training with the best in the world. And, we were on the verge of targeted sanctions. The words “human rights abuse”, “war crimes” and “dictatorship” were the primary words associated with Sri Lanka in the international media at that time.

That is lesson three. Our foreign policy must be based on openness and confident engagement. Not defensive and protectionist posturing and arrogance. The Westphalian era is over. Globalization means that we are inter-dependent and inter-linked. Confrontation, isolation and dependence on a single country will not bring sustainable economic development, peace or prosperity to our people. 

I will not go into detail about this government’s successes in reconciliation, democracy and foreign policy, other than to say that with the 19^th Amendment, Right to Information Act, UN Human Rights Council Resolution 30/1, GSP+ and a complete change in political culture, the Sri Lanka of 2014 and the Sri Lanka of today are incomparable. With these advances, we are today, firmly placed on a progressive path to healing and realizing our vision of a reconciled, democratic and developed Sri Lanka. 

Ladies and Gentlemen, 

The decade prior to this government’s election was characterized by grave and wide-ranging economic mismanagement. The impressive growth numbers of the immediate post-war years were an artificial sugar high. This was caused by expensive dollar borrowings wasted on imports and white-elephant construction. By 2015, the country had lost its economic sovereignty. We were at the mercy of international financial markets. 

Here are the numbers.

• In 2005, 3.8 percent of Sri Lanka’s foreign currency debt was commercial. By 2015, it was 37 percent.

• In 2005 Sri Lanka’s tax-to-GDP ratio was 14.2. By 2014, it was 10.1 percent.

• In 2005 industrial exports were 20.3 percent of GDP. By 2015, that number had reduced to 9.4 percent.

• In 2005 the number of commercial airlines flying to Hambantota was zero. In 2015, despite a 209 million dollar airport, there was only one, largely empty, flight per day.

This Government inherited an economy that was on the verge of collapse. And we stabilized it. The last four years have seen some successes, but the vagaries of cohabitation and a focus on political rather than economic reform, has meant that our plans have not been fully implemented. But the successes are substantial. Their fruits will hold Sri Lanka in good stead for many years to come.

• The new Inland Revenue Act is doing what it was designed to do; raising revenue for the government and making compliance easier, faster and cheaper for businesses. 

• This new Act, combined with fiscal discipline and the new Active Liability Management Act, enabled continuous access to financial markets, even after the crises of the last year.

• As a result of GSP+, the lifting of the ban on fish exports, macroeconomic stability and para-tariff reductions, exports increased from 13 percent of GDP in 2015 to 20 percent today.

• The loss-making Hambantota Port, which cost the tax- payer tens of millions of dollars a year, was leased, and is now generating jobs. The proceeds have been used to settle expensive dollar debt. The Port City Agreement was renegotiated on terms more favourable to Sri Lanka.

• This year, Sri Lanka laid the foundation stone for its first Free Trade Zone in 17 years. In the last year, we also improved 11 places on the “Ease of Doing Business” rankings.

• Most importantly, we have moved away from a corrupt, discretionary economic system towards a transparent, rules-based level playing field. 

We are now in the process of expanding good governance to the economy focusing on critical bottlenecks to growth; namely macroeconomic stability, SOEs and tariffs.  

You all know that Sri Lanka has experienced chronic macroeconomic instability since Independence. Since then, we have had no fewer than 16 IMF programmes. 

The pre-eminent cause for this instability is the fact that the government can finance its deficit by instructing the Central Bank to print money. In addition, the Secretary to the Treasury sits on the Monetary Board. As you all know, ministry secretaries are now political appointees. This government has respected the independence of the civil service. But many governments, if not most, have not done so. If there is one reform that will stabilize Sri Lanka’s macroeconomy, it is Central Bank de-politicization and independence. That is what will be done when the Monetary Law Act goes to Parliament in the next month; complemented by fiscal rules legislation designed to prevent Sri Lanka from living beyond her means.  

Another area where economic decision-making has been politicized, is in State Owned Enterprises. SOE management has become political rather than professional, resulting in waste and corruption. For example, my personal view is that Sri Lankan Airlines is a vanity we cannot afford. Keeping an airline flying for a misplaced sense of national pride, when that money could be used to heal the sick, educate children, or improve nutrition is criminal. In fact, since re-nationalization Sri Lankan Airlines losses have been 2.5 times the size of the education budget. 

Two urgent reforms are necessary. First, the state needs to cease to have operational control over SOEs operating in competitive markets. Chinese reformers often used to say “The state guides the markets, the markets direct the enterprises.”  The state can remain an owner of assets without having operational control. It can list SOEs operating in competitive markets, and use the listing proceeds to settle Sri Lanka’s debt. Or invest in funds that track the Colombo Stock Exchange. 

Second, in the case of natural monopolies, like railways, the state needs to create a holding company with a de-politicized board. For example, by subjecting board appointments to Constitutional Council approval. 

Finally, our export sector has been crippled by para-tariffs caused by businessmen influencing politicians. This has also led to large increases in prices. For example, last year cement cost more in Sri Lanka than in Malaysia, Thailand, Bangladesh, India and Pakistan. This affects construction of both factories and houses. As envisioned in the Budget, we need to go back to the simple, non-discretionary three-band tariff structure that we had in the early 1990s by eliminating non-tariff barriers. This will de-politicize our border tax-policy and bring huge benefits to exporters and consumers. 

Allow me to wind up my speech by saying the lessons of our past could not be clearer. Prosperity requires us to move even more decisively in the direction of more democracy, more reconciliation, more rule-of- law, more depoliticization, more openness, more competition and more reform.  And I am very confident that this the direction that Sri Lankans will choose once again.