Former Central Bank Governor Ajith Nivard Cabraal in an interview with the Daily Mirror spoke about the Government’s Budget and its implications. The interview done with Cabraal follows.
Q As the former Governor of Central Bank how do you view the Budget which the Government claims is futuristic and is earmarked to be implemented over a period running up to 2025?
Budget 2018 is certainly not a futuristic Budget, but a hotch-potch budget with various conflicting strategies. It is bound to fail just like the previous two Budgets presented by this Government. That is sad because it will be the people of our country who would suffer as a result, since there will be no development carried out nor new jobs created. There is also hardly any special thrust or priority sectors earmarked and accordingly there will be very little investment that’ll flow into the country. Although a few people, who have been given positions by this Government, have expressed some positive comments regarding this Budget, you could see by the reaction of markets, that deep down, the private sector isn’t convinced that this Budget would deliver any beneficial results. This Budget also doesn’t contain any measures which would ensure stable prices, a strong financial system, regular job creation, healthy investment flows, robust forex turnovers, moderate interest rates and stable exchange rates. Without such a focus on the macro-economy, Budget making will not be of any value or relevance.
However, this Budget is strong in one aspect. That is, it focuses heavily on increasing revenue. It is all about how to extract more taxes across more sources, on more occasions, from more people. The Government obviously thinks that when they tax the people more, the more successful the Budget will be. Perhaps, that is what the IMF has told them, and this amateurish Government seems to have swallowed that advice. But very soon, they, as well as the people, will realize that they have made a huge mistake because investment streams will dry up, business activity will falter, growth will stagnate, and the debt burden will rise to unmanageable levels. These pressures will, in turn, increase inflation, enhance interest rates, cause job losses and place the economy in serious jeopardy.
When reading through the Budget speech, it is also observed that, uncharacteristically for a Finance Minister, nothing has been said about the progress of the economy. That silence was obviously because he had nothing positive to say, about the progress under their watch and I am sure the situation in the coming year will be much worse.
- Growth will stagnate and the debt burden will rise to unmanageable levels
- During our term,we were able to improve the Debt to GDP ratio substantially
- Businesses will falter
- As we all know, the total taxes charged from the people in various forms have been doubled in absolute Rupee terms, from 2014 to 2018
- People will realize its repercussions soon
- This Government in its initial period has increased the Public Debt by Rs. 2,777 billion
Q The previous Government under which you served is blamed for the debt burden. How do you counter that?
In any country, the ‘debt burden’ is measured technically and professionally, by the ratio of the amount of the debt, expressed as a percentage of the Gross Domestic Product of the country. In that context, the Debt to GDP ratio which, at the beginning of 2006 was a very high 91%, was systematically reduced to a more comfortable 71%, as a result of the Rajapaksa Government’s prudent economic and debt management. Therefore, it will be seen that during our term,we were able to improve the Debt to GDP ratio substantially and ensure that there was absolutely no debt crisis, with Sri Lanka having a stronger re-payment capacity, quite unlike to what is now being falsely claimed by the Government, ad nauseam, that Sri Lanka was in a debt trap at that time.
That feat was achieved even while undertaking massive infrastructure development, which increased the debt in absolute terms by Rs. 5,169 billion (in 9 years) from Rs. 2,222 billion at the beginning of 2006to Rs. 7,391 billion by end 2014. In sharp contrast, this Government, in its initial period in office of 2 ½ years, has increased the Public Debt by Rs. 2,777 billion, although there has been hardly any increase in the GDP and nothing to show as development on the ground, as a result of such borrowing. Worse still, the Debt to GDP ratio has now shot up to 85% from 71%, and has undoubtedly pushed the country into the debt danger zone.
Q The Government claims that debt payment for the next couple of years is much higher as a percentage of the state revenue. How fair is that statement?
What is most relevant and important about debt repayment is the Government’s ability to meet its debt. From the time this Government assumed office, it has been managing the Public Debt in a foolish, hap-hazard and irresponsible manner. First, they announced to the world that the country is in a “debt crisis” and that they are finding it challenging to re-pay the debt, when it was not. Do you know of any company chairman who announces to the markets that his company is finding it difficult to pay its debts? Second, when the foreign investors got frightened and rushed to withdraw their investments from the Government securities, they squandered our foreign reserves, but yet had to let go of the exchange rate which depreciated significantly, causing massive increases of about Rs. 427 billion (nearly 3 times what the Government will get from selling the Hambantota Port) in the Public Debt in Rupee terms. Third, the Government carried out the now infamous Bond Scam which caused all interest rates to rise and remain at elevated levels since, which has made the raising and repayment of debt much costlier: in fact, Sri Lanka must be the only country where interest rates were increasing at a time when inflation was decreasing!
Those occurrences have shown that the so-called economic osthars of this Government have not only been terribly corrupt, but also downright imprudent and foolish. As a result of these misadventures, the Prime Minister’s reckless prophecy has come true, and ironically Sri Lanka is today in that self-created Debt Trap. Sadly, this situation is becoming worse and it doesn’t appear likely that these self-proclaimed financial wizards would be able to do anything that would arrest this deteriorating situation.
Q The economic viability of the Hambantota Port and the Mattala Airport are always questioned by the Government. How do you view these two projects?
All persons knowledgeable in shipping and ports, recognise that strategically-located ports play a very important role in shaping an economy of a country. In that context, people the world over, have been speaking about the merits of locating a port in Hambantota for a long time, because Hambantota is directly the path of the East-West sea route. Accordingly, such a port is bound to have tremendous potential and in the long term, the Hambantota Port will be one of the greatest assets that Sri Lanka would have in its economic growth story. At the same time, it must be recognised that no port, however well located it may be, can deliver results in its first few years. In fact, the Colombo Port took almost 200 years to realize its full potential, although it had been providing a massive impetus to the economy of Sri Lanka.
The new Hambantota Port, in a very short period of time, had been able to make a significant impression in the global shipping arena, while servicing its loans without any default. It was gradually picking-up in its operations in a satisfactory trend, even while its detractors were condemning the project. All knowledgeable businessmen know that large scale projects have fairly lengthy gestation periods. For example, a large new hotel won’t be filled to capacity in 2 or 3 years, but over 5 to 10 years it will generally start showing positive results and perhaps substantial profits too, with its shareholder value and goodwill appreciating significantly over the longer term. Similarly, a large port also will usually yield substantial profits, massive capital gains and other ancillary economic benefits over the long term, if it is nurtured and positioned during its first decade of operations, given the location is strategic. Ask yourself the question; why is it that the Chinese are so eager to pay over a billion US dollars to assume a 80% stake of the Hambantota Port?Are they crazy to do so? Obviously not. If so, isn’t it this Government that is crazy or corrupt or reckless to alienate this highly valuable asset for a mere pittance which doesn’t even take the value of the vast tracts of land that forms part of this Port project, into consideration?
In the same manner the Mattala Airport too owns a huge tract of land, adjoining the airport, and was constructed at a comparatively modest cost thereby enabling this international airport to be of great significance and value in the future. Unfortunately, that asset too is to be frittered away for a pittance by this short-sighted Government to India, probably to settle an ‘election’ debt. It is now clear that what this Government is able to do properly, is criticise and find fault with the former Government’s projects. They are unable to do anything of any value on their own. Even worse, they are hell-bent on selling national projects with the best future prospects, under the guise of getting out of a debt trap, which they themselves created. Their actions can be likened to that of a drunkard or drug-addict who periodically sells his household goods to have the money for his next drink or drug-dose. By these actions, our current leaders are actually depriving our country’s future generations of realising their true potential, while also destroying the foundations for the future progress and prosperity of our country.
Q The Government has proposed to increase its revenue more through direct taxation. The International Monetary Fund (IMF) has commended the measures for increasing tax revenue in this manner. From what angle are you looking at this?
This Government is in so much trouble, it is not in a position to argue with the IMF. It will have to do whatever the IMF says, and even if that means the entire country will be destabilized, it will have to obediently carry out IMF orders. As we all know, the total taxes charged from the people in various forms (direct and indirect taxes, customs duties, and excise levies) have been doubled in absolute Rupee terms, from 2014 to 2018. Total taxes that were about Rs. 1 trillion in 2014,will increase to over Rs. 2 trillion in 2018. As a result of these additional burdens, people will be unable to carry on with their businesses, and more jobs will be lost. Very soon, it will be unbearable for small and medium scale businesses since interest rates have already increased by over 50% now, from the rates prevailing as at end of 2014. As a result,thousands of cheques are being returned daily, and people are finding it very difficult to even exist. On top of that, when the new taxes imposed actually take effect, it will kill enterprise and industry, and it will only be through various manipulations that this Government will be able to show some economic growth, in much the same way, that it manipulated the growth figures last year to show a growth of 4.4%,when it was actually 2.2%. I pointed out this manipulation in May this year, with facts and figures, and no one from the Government has yet been able to challenge my workings.
Q What is your view on the move to completely replace carbon emission vehicles with electric cars by 2040?
On the surface, it may appear fashionable to say that Sri Lanka would have only electric cars by 2040 in this designer-budget. But, it all depends on whether this Government, which can’t even satisfactorily distribute fuel to the people, can carry out an initiative like that. This Government is now famous for its adhoc decisions and its ‘stop-start’ initiatives. They regularly come up with all kinds of slogans; first, it was free Wi-Fi for all. Next it was free tabs for all students. Now it is about electric cars for all. A few days ago, it was free shoes for all. The list continues, but everyone knows nothing will happen!
Q Your name is being dragged into the improper investment of money from the EPF during your time. What is your response to this allegation?
The EPF made its best progress during my tenure as Governor and its financial returns during that period were consistently higher. By its professional financial management, the EPF Investment Committee was able to build the EPF into a stable, long-term fund, and all investments were made prudently and professionally in Government securities and in shares. The fund’s well-diversified portfolio also made substantial profits and capital gains, as reflected in the financial statements of the EPF.
At the same time, all processes, procedures and approvals in respect of all investment decisions were followed diligently during my time. All external reviews and audits, particularly the external audit undertaken by the Auditor General, have not faulted the EPF managers in relation to their investments, to the best of my knowledge. In stark contrast, what happened in the Bond Scam? The time-tested and well-designed systems of the Central Bank were changed arbitrarily and suddenly on political orders, and massive losses were caused to the EPF at the expense of connected parties. The EPF was stopped from bidding for treasury bonds at the primary auctions, and the state banks were ordered to bid low.These corrupt practices have led to huge increases in the interest rates in our country, causing further serious losses to all stakeholders in our economy.
Q There is an allegation that you issued the licence for Perpetual Treasuries at that time. It is currently held responsible for the bond scam. What is your response?
It is correct that the licence for Perpetual Treasuries was granted by the Central Bank and the Monetary Board during the time I was the Governor. However, if someone critically examines and reviews the processes applied in the grant of such licence, it will be seen that the correct procedures and processes had been followed by the Central Bank and the Monetary Board in issuing that licence, as with all other approval processes during my tenure of office as Governor. I can also assure you that, during my time, there weren’t sudden changes to processes nor systems to provide an advantage to any selected party, at any time.
All systems and processes were followed diligently and professionally in all regulatory actions and approval processes, and there hadn’t been a single instance where the Auditor General or any other review body had stated that there has been any wilful and deliberate departure from process to provide an advantage to anyone. That is why, other than some UNP politicians, no other stakeholders have complained about the Central Bank’s actions during my time. Even in the case of the investment in the Greece Government Bonds, the Supreme Court clearly ruled the Central Bank and Monetary Board had diligently followed due process, and that there was no irregularity whatsoever, even though a tolerable business loss was incurred in that investment while the Central Bank recorded its highest-ever profit from reserve management, during that year.
Q What is your response to the allegation that irregularities took place regarding bond issues during your time as well?
That is a blatant untruth, which was initiated by the Prime Minister in March 2015, immediately after the fraudulent Treasury Bond issue of February 27 2015, probably to deflect public attention from that scam that was hitting the headlines. That highly irresponsible allegation was obviously made to implicate the former administration and thereafter, the Auditor General was also requested by the then Finance Minister to conduct a detailed examination into all the Treasury bond issues during my time. In response the Auditor General reported that there were no improper issues during my time. This report caused much heartburn to the best Finance Minister in Asia, who has been attacking the Auditor General, ever since. You may also remember that recently, when a UNP MP demanded that I be summoned by the Presidential Bond Commission, I immediately issued a statement that I would be happy to give evidence before the Commission. In fact, I wrote to the Commission clarifying certain matters which arose during the Commission sittings, while also informing them that I would be very happy to answer any question that the Commission may have at any time. In response, the Commission asked me to send my submissions in writing, and I did so.