Agro-industrialisation should be focused on
Many countries have resorted to printing money in order to overcome the post-Covid-19 situation
Countries reverting to protectionism
Western market access given subject to agreeing on intrusive policies such as democracy and ethnic integration, is definitely a dangerous proposition and must be revisited
Asia will play an important role in the shift in cash flows and in the balance of
global demand over the next few years.
Sri Lanka will not find it difficult to re-issue and repay its dollar debt
At some point, a budget for 2019 and 2020 must be tabled
Dr. Kenneth De Zilva, an economist and member of the Monetary Policy Consulting Committee of the Central Bank, speaks about post COVID-19 challenges and opportunities for
Sri Lanka. He is a business cycle economist and financial market specialist. He is also a member of the board of the Institute of Policy Studies.
Q How do you analyse the impact of COVID- 19 from an economic point of view?
While the loss of life is deeply regrettable, to me personally, this is an opportunity to reshape, reorient and reposition our national economy. The world has now realised that basic human needs such as food and health security are paramount. Sri Lanka too has realised this by now. Having placed our faith in external food supplies rather than in our domestic farmers, and in doing so over the past two decades, we have decimated this sector. It now has declined to seven percent of GDP from 20 percent in 2001. One may argue that the world has changed since then and moved from agriculture to services. Yes it has, but as a consequence of this shift, we are now faced with serious cash flow and balance of payment issues.
If you look at data, you will find that our food import bill amounts to $ 2 billion, of which we spend $ 300 million each on sugar, wheat/maize and milk. We also import fish to the value of $ 300 million. This is a crime for a country being surrounded by the ocean and blessed with an exclusive economic zone (EEZ) of 517,000 KM2. Our food imports have almost tripled since 2005 from $ 570 million to $ 1.6 billion in 2019. While the growth and contribution of the service sector should be acknowledged, it definitely does not mean we must destroy agriculture or agro-industrialisation at the expense of focusing on services alone and importing all our food needs in the name of “comparative advantage” or “consumerism” as advocated by a few (neo) liberal economists. If we had continued down this path, it would have resulted in serious consequences, causing far more damage to the real economy and society.
We need a strong industrial and export policy framework that ‘picks winners’ and a dynamic development bank that can support the country’s journey
COVID-19 has made us appreciate our agriculture base, farmers and national food security policy. Bold decisions are being made to ensure domestic food supplies are made a constant in our development journey. Policymakers are not only looking at agriculture from a food security point of view, but also as an export income-generating mechanism linking the supply side. This is an exciting proposition as agro-industrialisation is the future. The world is now looking for high quality, healthy, agri-based products and raw materials for sustainable manufacturing. Sri Lanka will do well to reposition agri-manufacturing to this much sought-after market segment, namely the rapidly growing middle-classes of Asian countries. Here is now the mother of all opportunities that must be monetised. If this is to happen, Sri Lankan companies need to undertake extensive market research and product development to increase their patents count from the current 175 levels and invest in new packaging technology and branding. Anecdotal evidence suggests the government is encouraging entrepreneurs to venture into this lucrative agro-industrialisation business model with many incentives being offered. This is definitely a step in the right direction if we are serious about achieving percent GDP growth from 2021.
Since protectionism worked in the past, it could be used as a potent policy once again to achieve the same results
Q Sri Lanka seems to be recovering faster than most other affected countries. In economic recovery,
how will the global situation affect Sri Lanka?
Yes, on the COVID-19 global health indicators, Sri Lanka is doing extremely well and has surpassed many developed countries in containing and managing the situation and the number of fatalities. This is absolutely brilliant and needs to be commended. We expect to see a fairly quick turn in economic activity in Asia, led by China, who is expected to grow its GDP at 5pct, contributing $ 700 billion of revenue to the global economy. The rest of Asia is well-positioned to tap into this recovery led by China. Hence, we could expect a “V” shaped recovery in Asia. This would help Sri Lankan trade, investments, and also tourism.
On the economic front, Sri Lanka is not badly off as GDP growth could still reach percent to 3.5 percent in 2020 and get back 6 to 7 percent in 2021, despite the global west being fragile. Therefore, there is some concern, given that our economic structures are asymmetrically skewed towards western markets with $ 4.6 billion or 37pct of apparel and $ 1.8 billion or 50pct of tourism revenues being from this segment. However, we need to put this concentration risk into perspective as Sri Lanka has an annual average cash inflow of approximately $ 27 billion and the west contributes approximately 28pct of this total including that of private remittances. Even in a worst-case scenario, if we factor an annual decline of 30pct in revenue, our total loss would be approximately $ 8 billion. Similarly, on the cost side, we will witness savings. We have already witnessed global crude oil prices decline to a historic low of $ 15 per barrel. If we anticipate a “V” shaped recovery, we could see crude oil average at $ 30 per barrel. This would result in an approximate savings of $ 2.5 billion from petroleum imports alone. Should apparel exports decline by 35 percent, it could result in raw material imports declining by $ 1.5 billion. Savings from outward travel too would add a further $ 1.5 to 2 billion. Therefore, the overall situation is still within manageable parameters.
Our usage of the “Made in Sri Lanka” brand and trademark has not been fully exploited when clearly its potential is $ 100 billion
Q What kind of macro or fiscal policy changes does the Central Bank advocate to stimulate growth?
The Central Bank of Sri Lanka (CBSL) has already signalled its departure from the established ‘austerity mindset’ that prevailed a few years back. This mindset dragged the economy to its lowest GDP growth since 2001. This departure is much needed and is a welcome change with CBSL now being more focused on adopting countercyclical policy measures focusing on a production economy which is beneficial to stimulating growth in corporate balance sheets. Apart from the dovish monetary measures taken by the CBSL, and the already announced fiscal stimulus in December 2019, the government has provided relief to the public to overcome the global pandemic. This will stretch government finances from its original plans and the fiscal deficit for 2020 will be approximately 8.5pct of GDP. This is not too bad given that in 2015 we did reach 7.5pct of GDP sans COVID-19 or any such major health outburst. The petroleum stabilisation fund introduced by the government is also an important policy decision as it helps the country gain more control over channelling excessive consumption of fuel and incurring a further loss of foreign reserves. A 10pct increase in fuel consumption costs the country $ 375 million per annum. This stabilisation fund helps the overall balance of payments and price stability objectives while ensuring the Ceylon Petroleum and Ceylon Electricity Board benefit by strengthening their respective balance sheets. In the larger macro framework, the strengthening of balance sheets of these two state-owned enterprises (SOEs) would be beneficial to the real economy thereby reducing the drag on the budget deficit entailing ‘crowding- in’ which in turn will help the country adopt a pro-growth path towards fiscal sustainability.
The next 6 to 12 months is important for market share drive as the ‘Rise of Asia’ remains supportive of SL’s trade, tourism and investment
Q There is a call for protectionism at this hour. How practical is it from your point of view?
Protectionist policies were commonly used by developed nations during their period of globalisation in the 19th and 20th centuries. High import tariffs, selective FDI, subsidies and rebates to domestic industries were common features introduced with a view to capturing global market share. So you could argue that protection was the mean towards market share. Therefore, since protectionism worked in the past, it could be used as a potent policy once again to achieve the same results. Today, many of the western and east Asian economies such as China, Malaysia, South Korea, Singapore and Vietnam have caught on this policy truism and are now considered “developed” countries while nations like Sri Lanka languish as “developing.” The reason being Sri Lanka was forced by the World Bank, IMF and WTO to adopt free trade and liberalisation and is now faced with a ‘development dilemma.’ Strangely, while Sri Lanka turns away from protecting local infant industries, the global economy which once called out for and forced free trade down the throats of developing countries has now recoiled and getting back to the US’ Alexander Hamilton and the UK’s Robert Walpole doctrines of protectionism.
Q Sri Lanka is likely to lose its export market for garments due to the coronavirus crisis. How can the government mitigate it?
Sri Lanka is unlikely to lose its total market for apparel. However, our bias towards western markets for trade, tourism and investment is strange to say the least. This skewed revenue approach is now becoming an issue as it increases the quantum of dependency. In some instances, western market access is given subject to agreeing on intrusive policies such as democracy, transforming the judiciary and ethnic integration. This is definitely a dangerous proposition and must be revisited. To move away from this dependency, our export product mix too must change with the export of raw material halted. Our usage of the “Made in Sri Lanka” brand and trademark has not been fully exploited when clearly its potential is $ 100 billion. This number is attainable as Sri Lanka has the potential, talent, skills and entrepreneurial mindset to shift its manufacturing capabilities. For this, we need a strong industrial and export policy framework that ‘picks winners’ and a dynamic development bank that can support the country’s journey. Our industrial policy must be shaped similar to what was done by Japan in the 1950s and other east Asian economies in the ‘80s and ‘90s that successfully followed the US Treasury Secretary Alexander Hamilton policies. Sri Lanka too should strongly consider these pillars of legislation if we are serious about competing for global market share. A “Global Sri Lankan Business Model” would be a possible reality only then.
Q There are reports about money printing to support the government’s COVID-19 response. What is the actual situation?
Yes, it is true. Many countries have resorted to printing money and running large fiscal deficits in order to overcome the post-coronavirus situation to help their economies cushion the blow of lack of demand. Therefore, we find that in times of banking crisis, economic emergency, wars, western central banks have always gone to the printers and run large budget deficits. In 2007, the US Federal Reserve printed $ 3.9 trillion and ran a budget deficit of 9pct of GDP to bail out investment banks, the automotive sector (i.e. General Motors and Chrysler) and manufacturing sector, going against its “free markets” doctrine. In fact, the world’s four most powerful central banks, namely USA, UK, EU and Japan injected $ 9 trillion in liquidity to stimulate growth between 2008 and 2013. This time around too, the US Federal Reserve alone added $ 7.0 trillion through asset purchases, primarily by the US Treasury securities and Mortgage-backed securities and is expected to run a budget deficit of 19pct of GDP. In fact, what is interesting is that the outcry that excess money supply leads to inflation and budget deficits lead to crowding out has been subdued and ignored by the very same monetary economists who profess such theories to developing countries like Sri Lanka when faced with similar situations.
Q What kind of a global response does Sri Lanka look forward to rejuvenating the growth in the post-coronavirus crisis context?
In the short-term, Sri Lanka needs space for its cash flow management. In this context, the Sri Lankan Government has requested multilateral and bilateral lending agencies to ease debt payments during this post-coronavirus period, by way of a moratorium and it is strongly believed this would be made available to the country.
With the global economy and more so Asia, showing positive signs of recovery, Sri Lanka too will need to look its internal economic drivers and ensure we provide adequate stimulus to these sectors mitigating any possible decline in some of the key markets which Sri Lanka is exposed to in the short-term. The next 6 to 12 months is important for Sri Lanka’s market share drive as the ‘Rise of Asia’ remains supportive of Sri Lanka’s trade, tourism and investment, given that Asia accounts for 40pct of global GDP, 35pct of merchandise trade and 60pct of the global population and is home to a burgeoning and affluent middle-class, estimated to be between 600 million to 1 billion with an annual wallet of $ 3 trillion. Therefore, Asia will play an important role in the shift in cash flows and in the balance of global demand over the next few years.
Q Sri Lanka needs a lot of foreign exchange for debt servicing this time. The country will lose its foreign exchange revenue sources. Likewise, there is no budget approved by Parliament to raise the borrowing limit. How can this problem be addressed?
Well, I am not sure how the country will lose its foreign exchange sources as these revenue sources will continue to remain. But I do agree that Sri Lanka has large foreign debt payments due both this year and the next. The sovereign bond debt is always manageable and I have said this many a time. People in Sri Lanka forget that these are global market negotiable debt instruments and there will always be buyers for single B-rate ‘junk bonds’ in a world where negative interest rates are a more popular theme. Any yield pick-up thrown into the yield-starved global financial markets will find plenty of buyers and therefore Sri Lanka will not find it difficult to re-issue and repay its dollar debt. The B-rating is nothing new as Sri Lanka has always been single B-rated by S&P and Moody’s since 2005. So here too there is no big change and people should not overreact.
Yes, under the Fiscal Responsibility Act No. 3 of 2003, the borrowing limit is set by Parliament. However, I believe the President has sought clarification regarding this from the Attorney General and would act accordingly in keeping with the Constitution while keeping the country operational. At some point, a budget for 2019 and 2020 must be tabled and with it, I think we would see the issues and concerns dissipate.