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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2964

Nivard Cabraal, Governor of Central Bank, optimistic about growing Sri Lankan economy

From our Political Correspondent

Colombo, 09 October, ( The Governor of the Central Bank, Nivard Cabraal, has forecast that the Sri Lankan economy will grow at 7 - 8 % with a low unemployment record of 6.3 %.Nivard Cabraal: Two sets of indicators could be cited to support the optimistic expectations on the Sri Lankan economy-  the realized outcome in the recent past and the medium to long term economic performance.Nivard Cabraal: Two sets of indicators could be cited to support the optimistic expectations on the Sri Lankan economy- the realized outcome in the recent past and the medium to long term economic performance.

He cited these statistics in response to questions posed to him by the Asian Tribune.

Sounding a positive note Cabral states:1. the Sri Lankan economy moved on to a high growth path as evident in economic indicators; 2. the monetary policy is aimed at curbing inflation and inflation expectations; and 3. external trade continues to expand.

He also pointed out that though the external remittances of migrant workers had shot up from Rs. 132 billion in 2002 to Rs. 443.3 billion in 2006 (projected figures) the oil bill too had shot up from Rs, 58 billion in 2002 to Rs, 551.2 in 2006. The gap between the remittances, Sri Lanka’s biggest foreign exchange earner, is growing according the latest figures.

Highlighting the employment prospects he states that 14 national universities (leaving out the Open University) produced 10,730 (2004) and 10,525 (2005) graduates per year. Of these 25% are professional who can find jobs easily. It is the arts graduates who find it difficult to find jobs. The government has no policy of recruiting the arts graduates. They are recruited only a needs basis.

Here is the full text of the Q & A:

Question: You were quite upbeat about the economy in your interview with the BBC. What are the indicators that make you so optimistic?

Nivard Cabraal : Two sets of indicators could be cited to support the optimistic expectations on the Sri Lankan economy. They are the indicators of the realized outcome in the recent past and the indicators of the medium to long term economic performance.

• The Sri Lankan economy moved on to a high growth path as evident in economic indicators. The monetary policy is aimed at curbing inflation and inflation expectations. External trade continues to expand The economy grew by 6 per cent in 2005 followed by 8.3 per cent in the first quarter and 8 per cent in the first half of 2006. This growth has been supported by all three sectors of the economy. The agriculture sector grew by 7.3 per cent in the first quarter of 2006 while a healthy growth was recorded in all major sub sectors within the industrial sector. The services sector is expanding by benefiting from the major contribution from sub sectors of telecommunication, ports and financial services. It is expected that the growth will be around 7 per cent in 2006.

• The monetary policy is aimed at curbing inflation and inflation expectations. External trade continues to expand The Central Bank adopted a tight monetary policy stance from 2004 to contain the high growth in money and credit aggregates to contain inflationary pressures in the economy. In response the growth in reserve money supply has decelerated to 17 per cent in August 2006 from around 20 per cent. The growth in broad money has also decelerated from 23 per cent to 18 per cent by July 2006. The relatively high inflation in recent months has been due to supply constraints and the pass-through of the increased fuel prices. Inflationary pressures are expected to diminish gradually with the contained growth in money supply.

• Government finance has also shown a number of positive improvements. Total revenue/GDP ratio is continuing its increasing trend. In particular, tax revenue has increased benefiting from continuous reform efforts. A number of measures have been initiated to rationalize the recurrent expenditure. As a measure to reduce the cost of oil subsidies, the government discontinued the pricing formula and allowed oil companies to determine retail prices. In addition, the government is also considering the possibility of entering in to hedging arrangements with suitable counter parties to mitigate the adversaries arising from high and volatile international oil prices. Public investment increased to 6.3 per cent of GDP in 2005 from 4.8 per cent in 2005. In 2006, it will be about 7 per cent of GDP. Meanwhile, the debt to GDP ratio has declined significantly by end 2005 to 93.9 per cent of GDP from 105.5 per cent in end 2004. It will decline further in 2006.

• External trade continues to expand. During the first six months of 2006, export earnings increased by 8.8 per cent. Imports also recorded a 20.3 per cent growth particularly with increased investment and intermediate goods, which reflects the expansion in domestic production/construction activities. Private remittances increased by 24 per cent during the first seven months in 2006. The Balance of Payments recorded a surplus of US dollars 199 million during the first eight months in 2006 thereby increasing the gross official reserves to US dollars 2,557 million by end August 2006. Tourist arrivals increased by 12 per cent to 405,500 during the first eight months in 2006. Tourist earnings increased by 38.5 per cent to US dollars 295.7 million during the same period. Reflecting the improved external position the foreign exchange market has become relatively stable with Rupee appreciating somewhat during September 2006.

• Looking ahead, the government’s policy statement, ‘Mahinda Chintana’ has emphasised the need for infrastructure development, particularly the rural infrastructure, which will enhance the access to markets and will help boost economic activities throughout Sri Lanka. Medium and large-scale infrastructure projects are also being implemented. The prompt implementation of these projects to address infrastructure bottlenecks will enhance the capacity to grow thereby facilitating the private sector economic activities. Investing in human capital and encouraging technology improvements by entrepreneurs have also been emphasised.

The need and the commitment for ensuring policy consistency and stability are among the priority areas. The provision of institutional support and incentives for research and development to enhance productivity are also a major part of the policy. The government is highly committed to a negotiated settlement for the ethnic conflict. It will boost the investor confidence leading to enhanced investments. Modernising the legal and regulatory system and improving low and order are also envisaged. Meanwhile, appropriate safety nets will be put in place to ensure that the vulnerable groups are protected.

• The government has unveiled a strong policy package with consistent set of medium term targets. The medium term budgetary framework (MTBF) of the government expects to strengthen the fiscal consolidation process further to complement the effective implementation of monetary policy. Increasing revenue, rationalising current expenditure and increasing public investment are integral parts of the MTBF. While making efforts towards reducing the budget deficit, borrowing from domestic sources is expected to contain gradually thereby leaving more funds for the private sector investment. To achieve a higher economic growth, total investment of the country is expected to increase gradually to about 30-35 per cent of GDP. External sector policies are directed towards maintaining sufficient external reserves and stability in the foreign exchange market while maintaining external competitiveness. The expected expansion in the world economy will complement the objective of achieving a favourable external position.

• With all these broad policies, the economy is expected to grow by 7-8 per cent in the medium term, which will help reduce poverty, unemployment and regional economic disparity.

Question: IMF has stated that most South Asian economies are performing well, keeping a tight lid on inflation except Sri Lanka. It is running around 15 per cent, which is high? Did this happen because the government is printing too much money, as stated by IMF?

Nivard Cabraal : The currently high inflation in Sri Lanka is not only due to expansion in money supply. Demand pressure from Tsunami reconstruction work, direct and indirect impact of upward adjustment in domestic fuel prices, increase in import prices of some imported food items and seasonal decline in food supply have contributed to recent increase in inflation.

• The Central Bank prepares a monetary programme considering the additional money required to facilitate increasing economic activities. Accordingly, the desirable level of reserve money is projected and the Central Bank conducts monetary policy mainly through Open Market Operations to maintain the projected level of reserve money. The Central Bank has taken several policy measures to curb the monetary expansion and accordingly the growth in reserve money has decelerated. As the IMF stated in its recent press briefing, the increase in credit to the government by the Central Bank is not the only source of increasing reserve money. It has other components such as increase in foreign assets of the Central Bank. Hence, the better way to look at the monetary expansion is to look at overall expansion in reserve money.

Question: What measures will you be taking to control of the money supply and inflation?

Nivard Cabraal : The Central Bank tightened the monetary policy stance since end 2004 with the emerging signs of inflationary pressures in the economy. Hence, in view of containing the high expansion in money supply and curbing the demand-driven inflation, the Central Bank pursued the following policy measures.

• Increasing Policy Interest Rates: The Central Bank’s policy interest rates, viz., the Repurchase (Repo) rate and the Reverse Repurchase (Reverse Repo) rate, were gradually raised by 262.5 basis points, from 7.00 per cent and 8.50 per cent, respectively, at end October 2004, to 9.652 per cent and 11.125 per cent, respectively, by end September 2006.

• Conducting Open Market Operations (OMO) to manage Market Liquidity: The Central Bank conducted OMO aggressively to absorb any excess money from the money market. The Central Bank also conducted outright auctions to sell Treasury bills on a permanent basis out of its holding of Treasury bills to reduce excess liquidity in money market. In addition, the Central Bank refrained from subscribing at primary market auctions for Treasury bills whenever possible, thereby curtailing reserve money growth.

• These monetary policy measures have been effective in containing the high growth in money and credit aggregates. Since the monetary policy transmission requires a certain lag, a further deceleration of the growth in money supply and hence inflation is expected in the future. The Central Bank is monitoring these developments and if necessary take further measures to tighten monetary policy by way of raising interest rates and conducting Open Market Operations.

Question: The rise in prices of oil has had a severe impact on inflation and cost of living. How do you plan to combat the adverse effect of rising oil prices?

Nivard Cabraal : The government has taken several short-term as well as medium to long-term measures to mitigate the adverse impact of high oil prices on the economy.

Short-term measures

• Domestic prices of petroleum products, particularly petrol and diesel prices have been adjusted to a large extent to reflect increased international prices thereby reducing the subsidy payments by the government. Further, the government has decided to discontinue payment of oil subsidies from July 2006 and oil-distributing companies have been allowed to decide retail prices based on the cost.

• Government has successfully negotiated several bilateral agreements with oil exporting countries to import oil on extended supplier’s credit facility or on credit basis to reduce the impact of oil price increase on the BOP and the exchange market.

• The government is seriously considering possibilities of entering in to oil hedging to reduce the losses arising from volatility in the oil prices.

Medium to long-term measures

• The government has encouraged development of alternative renewable energy sources, such as small hydropower, dendro power and solar power by providing fiscal incentives. Gliricedia has been declared as the 4th national plantation crop (next to tea, rubber and coconut) considering its importance as a source of input for dendro power generation.

• Government has taken steps to expedite the construction of large-scale coal power plants and hydropower plants to reduce the dependency on thermal power.

Question: Overall, has there been a steady flow of investors? What is the reaction of the new investors to the renewed fighting?

Nivard Cabraal : Sri Lanka is a very good investment destination. All of our assets are still very competitive. Investors know that. The Board of Investment of Sri Lanka (BOI), the sole authority promoting foreign investments, has given approval for 149 new investment projects during the first six months of 2006 as compared to 95 projects approved in the corresponding period in 2005. During the same period, the number of agreements signed also increased to 102 as compared to 78 projects signed in first six months of 2005. The realised Foreign Direct Investment also rose substantially to US dollars 240 million during the first six months of 2006. There seem no indications that the recent escalation of violence has diminished investor confidence.

Question: The foot soldiers of the economy seem to be the migrant workers battling it out in the Middle East in particular? Is the current rate of foreign exchange earnings by these workers sufficient to offset the loss in paying higher prices for oil?

Nivard Cabraal : Earnings from exports still remain a primary source of foreign exchange, while the workers remittances have become a second important source. Remittances help largely to offset rising imports bills. Following table illustrates the coverage of oil import bills. It is projected that during 2006 increase in remittances would offset about 80 per cent of the projected increase in oil bill.

• The following table provides the estimated stock of Sri Lankan wokers by country and gender as at end 2005.

Table1 - Worker Remittances and Expenditure on Oil Imports
Remittances Oil Bill Oil Bill as a % of
Year (US $ Million) (US $ Million) Remittances
2000 1160,0 901,3 77,7
2001 1155,0 731,1 63,3
2002 1287,0 789,1 61,3
2003 1414,0 837,7 59,2
2004 1564,0 1209,3 77,3
2005 1918,0 1655,5 86,3
2006* 1359,0 1249,5 91,9
* Upto July 2006
Table 3; Estimated Stock of Sri Lankan Migrant Workers by Country -2005"
Country Male Female Total
Saudi Arabia 141.085 239.701 380.786
Kuwait 35.267 166.860 202.127
UAE 68.889 102.669 171.558
Qatar 96.577 22.192 118.769
Lebanon 7.168 86.208 93.376
Italy 15.007 45.212 60.219
Jordan 8.333 42.594 50.927
Oman 9.025 31.001 40.026
Bahrain 6.810 24.577 31.387
Cyprus 3.960 13.485 17.445
Maldives 12.288 4.623 16.911
Singapore 2.682 13.209 15.891
South Korea 6.176 1.718 7.894
Hongkong 304 2.649 2.953
Malaysia 2.507 1.049 3.556
Mauritius 392 930 1.322
Greece 391 424 815
Egypt 88 500 588
Seychelles 525 55 580
Libya 391 52 443
Africa 186 55 241
Pakistan 115 87 202
Israel 108 230 338
Syria 86 113 199
United States 107 32 139
China 110 31 141
Ireland 119 33 152
South Yemen 111 30 141
United Kingdom 61 114 175
Kenya 88 79 167
Others 1.970 325 2.295
Total 420.926 800.837 1.221.763
Source: Sri Lanka Bureau of Foreign Employment

Question: As seen in Lebanon, foreign exchange earnings are subject to severe and sudden fluctuations. What are the innovative measures taken to diversify the economy to cushion it from these body blows?

Nivard Cabraal : Even during the Kuwait and Iraq wars remittances to Sri Lanka did not fall and in fact we observed a growth in remittances, as the migratnts remited their savings to Sri Lanka with the escalation of war. According to the Bureau of Foreign Employment over 90,000 Sri Lanka migrant workers were in Lebanon when the Israel’s attacks on Lebanon began. Of these only around 6000 retuned to Sri Lanka and we did not face severe fluctuations in foreign exchange earnings. In fact, during the first eight months of 2006 worker remittances have grown at a rate of 24 per cent to US dollars 1,539 million, as compared to US dollars 1,237 million recorded in the corresponding period of 2005. As seen in the above table, Sri Lanakn migration for employment is somewhat diverisfited and this is likely to diversify further with more Sri Lankans now migrating to East Asian countries such as Singapore, Malaysia and South Korea.

Question: Current global indicators signal a rise in interest rates. Are you happy the current interest rate or do you propose to tighten it to curb inflation?

Nivard Cabraal : As the capital account transactions in Sri Lanka are still not fully liberalized, there is no full capital mobility and hence there is no direct impact of rising global interest rates to Sri Lanka. However, the Monetary Policy Committee (MPC) of the Central Bank reviews the macro- economic developments on monthly basis and the impact of various important factors on money and price stability in order to recommend policy measures required.

Question: The unemployment figures seem to be rising with at least 40,000 passing out of the universities. This has a potential for social tension and even explosions. What employment avenues are open to absorb the graduates coming out of universities? (Please give number of universities’ student population and strategies to solve the problem)

Nivard Cabraal : The unemployment rate has been decreasing during last few years.

Year 2002 2003 2004 2005 2006 1st Q 2006 2nd Q
Unemployment Rate % 8.8 8.4 8.3 7.7 7.2 6.3
Source: Department of Census and Statistic

• There are 14 national universities (excluding the Open University of Sri Lanka). Number of students admitted in 2004 and 2005 were 13,396 and 14,520 per year, respectively. The number graduated in 2003 and 2004 were 10,730 and 10,525, respectively. Among the passing out graduates about 25 per cent has been in professional categories such as law, medicine, dental, engineering and architect, where better employment opportunities exist.

• Unemployment is largely seen in arts and commerce stream graduates. As a policy, the government does not guarantee employment to graduates. They are absorbed to the government service only on need basis. However, there were over 40,000 unemployed or under-employed graduates by 2004, accumulated since 1999, when 15,000 unemployed graduates were provided with an employment. The government recruited them initially as graduate-trainees to various government institutions in 2004 and part of them have been recruited on permanent basis, where vacancies exist. About 15,000 have been recruited as teachers in government schools.

• Since the government find it difficult to absorb all graduate into the government service, it has formulates scheme called “ Tharuna Aruna” in collaboration with the private sector with a view to provide skill training, especially for arts and commerce graduate so that they would train for employment opportunities in the private sector.

Question: According to estimates, 25 per cent of the households earn less than a dollar a day. What are the poverty alleviation programmes designed to ease this situation and how far have they worked?

Nivard Cabraal : According to the Household, Income and Expenditure Survey of the Department of Census and Statistics, the proportion of population below national poverty line has declined from 26.1 per cent in 1990/91 to 22.7 per cent in 2002. The national poverty line in 2002 was Rs 1,423.00 per month. (As per World Development Report the population below US $ 1 a day was 6.6% and population below US $ 2 a day was 45.4% in 1995).

• The Samurdhi programme, launched in 1995, is the main poverty alleviating programme operating in the country. The main objective of Samurdhi programme is to up lift the living condition of targeted low-income people of the country. The selection criterion of beneficiaries used till 2002 was the monthly income of families less than the stipulated amount, depending on the number of members in the family.

• The Samurdhi Authority of Sri Lanka empowers the Samurdhi beneficiaries through various income generating projects and infrastructure development projects. Accordingly, various community development programmes in the areas of rural infrastructure development, savings and credit programmes and skill development programmes were implemented by Samurdhi Authority of Sri Lanka during 2005 and the first half of 2006.

- Asian Tribune -

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