From Left: ADB Sri Lanka Senior Country Economist Tadeteru Hiyoshi, ADB (Operations
1) Vice President Wencai Zhang and ADB Sri Lanka Country Director Sri Widowati Pic by Indraratne Balasuriya
The Asian Development Bank (ADB) will be pushing for capital market reforms in Sri Lanka for the country to receive the additional funding that was opened through the International Monetary Fund’s (IMF) US$1.5 billion 3-year extended fund facility. The IMF programme that has prescribed a plethora of painful fiscal reforms for the country to gain fiscal stability, has left paths open for US$ 650 million in additional bilateral and multilateral loans.
“We, ADB will focus on capital market reforms, so I think we will try to compliment the reforms,” ADB (Operations 1) Vice President Wencai Zhang said during his visit to Sri Lanka last week. The IMF package includes heavy fiscal policy reforms backed with numerous performance targets to bring about Prime Minister Ranil Wickremesinghe’s vision for a 3.5 percent budget deficit to gross domestic product.
Such heavy intervention, linked to multilateral loans, never before seen in Sri Lanka, is mostly welcomed by economists, as successive governments hadn’t brought in the reforms required to achieve fiscal stability. ADB Country Director Sri Widowati said that a possible funding line with ADB has not been negotiated yet, but is currently in the design stage, with the required policy actions to be negotiated and finalized within 2 months. “Broadly the ADB will grant support for the market. Firstly, strengthening the market’s legal foundation, regulatory oversight, and electronic systems,” she said. Widowati added that the ADB will also push to strengthen the functioning of the primary debt market and risk free yield curve, increase support for institutional investors, and provide measures to strengthen various capital market instruments and issuances. The government bond auction process had come under heavy fire recently with allegations of insider trading, which led to a change of the Central Bank Governor. Widowati noted that some policy actions are already in the works with the formation of a long-term capital strategy and legislation such as the new Securities and Exchange Commission (SEC) Act.
The SEC has found it difficult to punish wrongdoers as the current Act only provides the SEC with the power to pursue criminal prosecutions, and the new Act will provide room to pursue civil infractions. The Central Bank’s Monetary Board recently admitted that the need for further reforms to make the bond auctions more process-driven and transparent, with wide stakeholder engagement. Meanwhile, Zhang said that the World Bank and the Japan International Cooperation Agency (JICA) are also interested in providing auxiliary funding through the IMF programme, and will link their support to business environment improvement and other governance reforms. Perhaps reforms into the bloated public sector would also be included.
The budget deficit for 2015 soared from an initially projected 4.4 percent to 7.1 percent due to increased wages to public sector employees. The government is now seeking to employ nearly 10,000 more this year.The current government had criticized public sector recruitment while in the opposition.
Economic Corridor to Trincomalee under study
ADB is currently studying the possibility of an Economic Corridor to Trincomalee in order to boost the country’s tradable sector. “We are currently doing a study on an Economic Corridor from Colombo to Trincomalee, to see what sectors can be developed, what facilities are needed, so that factories can benefit,” Wencai Zhang said. He noted that most products manufactured in such areas will be sent to the export markets.
Economists have criticized that there has been a lot of investment into infrastructure and services, and not enough investments into developing the tradable goods sector, where Sri Lanka could increase its gross domestic product (GDP) in a more sustainable manner through export growth. Sri Lanka’s exports to GDP have been in a declining trend over the past 15 years. However, Zhang said that infrastructure perpetuates development in the tradable sector, possibly referring to trends seen in countries like Malaysia and China.
The ADB has been involved in the development of social and physical infrastructure in Sri Lanka, but recently gave a US$ 100 million credit line to small and medium scale enterprises— none of which are direct investments into trade. “We focus on development… but the tradable sector is important. To trade, you need infrastructure. How can you bring goods to export to the Colombo Port?” he inquired. He said that there could be a possibility of building an expressway to Trincomalee. Considering the construction of the Northern Highway to Jaffna, the future expressway could link up with it. “We need to convert the transport corridor to a trade corridor and then to an economic corridor,” Zhang added. He said that clusters of industry will pop up along the expressway, complementing the government’s goal to set up numerous industrial zones. Singaporean government agencies and Japanese partners are involved in creating a master plan for Trincomalee, to go ahead concurrently with the Western Province Megapolis project. India also has interests in developing Trincomalee. (CW)
More loanshang on reforms commitment
ADB is interested in providing Sri Lanka with up to US$ 2 billion in annual loans, grants and aid over the next 3 years, depending o n t h e commi tme n t to reforms by the new government. “In the next 3 years, we will increase funding to US$ 2 billion, once we see that policies are available, and the performance,” Wencai Zhang said.
He added that Finance Minister Ravi Karunanayake has been continuously requesting ADB to provide US$ 1 billion in finances annually. This is despite Karunanayake telling the media that Sri Lanka does not need any foreign funding, even after receiving the US$ 1.5 billion International Monetary Fund extended funding facility. Zhang noted that the ADB had extended US$ 600 million to Sri Lanka in 2015 and has so far provided US$ 700 million this year. The first 6 months saw the ADB extending a US$ 100 million small and medium enterprise credit line. The ADB had provided Sri Lanka with US$ 7.8 billion in grants, funds and aid over the past 50 years, mostly centred on infrastructure such as roads, sanitation and water supply development. However, Zhang noted that the future lending direction could change through the new Country Partner Strategy for 2017-2021, since Sri Lanka is entering a higher state of development. “We will help with some of the new needs of the country,” he said. He added that the ADB will now fund expressways, ports development, power generation and transmission, renewable energy projects, and smart cities. “In the future, we will support with higher allocation into research and development, research faculties and entrepreneurship,” Zhand said. ADB Sri Lanka Country Director, Sri Widowati added that the ADB will be involved with several projects within the Western Province Megapolis project. “…such as elevated port access roads, railways from Panadura to Veyangoda: not light rail but to improve existing railways and electrify them,” she said. She added that Finance Minister Ravi Karunanayake had requested help to implement the Colombo International Financial Centre. Meanwhile, Zhang added that the ADB will help to implement and monitor such public investments through increased technical assistance. Widowati expressed that the ADB is involved with technical advisory assistance with the Colombo Port’s latest expansion; the East Container Terminal. (CW)