Contemporary thrust of Sri Lanka’s development strategy: Part II
Following is Part II of the Dr. W.M. Tilakaratna Memorial Lecture delivered by Treasury Secretary Dr. P. B. Jayasundera. Part I was published in yesterday’s Daily FT
The 2005 Government did not have the comforts that Ronnie De Mel described. We in fact saw the opposite. The challenges the technocrats were required to manage were complex and there would have been doubts on their competencies. The paradigm shift in policy may have been unacceptable to those who believed otherwise.
Doubts must have been high as to how terrorism would be ended, how public investments would be channelled to so far neglected areas such as coal power, expressways, Colombo as well as Hambantota Ports, revival of the abandoned Moragahakanda and Uma Oya water schemes – which were all proposals in the country’s development agenda for the years ahead. On top of all, there was the challenge of having to undertake the management of highly indebted public finance.
Contemporary issues
Let me turn to share some thoughts on these contemporary issues since like the 1977 Government, this Government is virtually completing a 10-year term. The country is now five years down the post conflict status, with thanks for being successful in ending the long-drawn war against terrorism, which no doubt denied many opportunities Sri Lanka could have exploited to prosper as a nation.
Demining of mined land, resettlement of displaced persons, rehabilitation of misguided youth having reunified them with their families, restoration of diversified livelihood opportunities, health, education and public service delivery facilities, rebuilding infrastructure and providing connectivity, establishment of a devolved administration at provincial and local authority levels along with a fully functional decentralised administration, reconciliation initiatives etc. have taken place within these three years. Further, massive public investments have been undertaken in infrastructure, having placed the conflict affected areas to grow well above the national average growth rate of 7%.
The economy has reached middle income status with a per capita income of $ 3,300 in 2013. The country has seen the lowest rate of inflation at mid single digit level with price stability. Extreme poverty has declined, being confined to few pockets. Headcount poverty has declined from 22.7% in 2002 to 6.4% in 2012. Even on a much ambitious target of $ 2 per day, poverty has halved from 43% to 16%. Estate sector, which lagged in poverty reduction between 1995 to 2006, now records single digit poverty. Home ownership, access to pipe borne water, electricity, sanitation, transport, market places, education and health of bottom quintile has improved and the shift in the consumption pattern from food to non – food, indicates an improved standard of living.
Public investment is being sustained at a near 6% of GDP on power generation and transmission, irrigation networking and downstream development, expressways and the road network, island wide water supply systems, urban flood protection, provision of hosing settlements for the urban poor in with port and air port facilities along with public expenditure of around further 6% of GDP on education, health and targeted social and rural centric expenditure programs. These efforts have changed the economic landscape of the entire country and in turn kept the average economic growth at around 7% with investments rising to 30% of GDP by 2013.
The fiscal situation that got out of control under almost all successive Governments, has got a sound footing mainly due to restoration of peace and security that has enabled to keep defence expenditure at a manageable level of around 3% of GDP, and due to required adjustments in public spending, while also accommodating much needed reforms in taxation towards a broad-based low tax regime. The fiscal deficits have been reduced to a third from the level in 1980s and 1990s, having put in motion towards a 4% of GDP by 2016 through the generation of a revenue surplus, to be able to accommodate higher public investments and provide greater autonomy to the monetary policy towards a lower single digit inflation and higher external reserves. These measures have been taken having learned lessons not only from the collapse of the Korean War boom, but also from the financial crisis that was recently experienced by advanced and emerging economies.
The policy towards obtaining external financial resources from both Development Partners, through foreign direct investments and capital markets is being oriented towards infrastructure development and trade in goods and services, which involves financing the import content to create long term production capacity in the economy. This is expected to minimise pressure on external reserve management and exchange rate stability. They are vital aspects in productivity development and in creating a predictable investment and growth regime. The policy attempt is to share the cost of financing sectoral programs in the national development strategy with annual funding available from Development Partners, which are reflected in the rolling Medium Term Budget Framework that goes through a wide consultation process annually, both in terms of preparation and approval by Parliament.
It is encouraging to note the support extended by the World Bank, Asian Development Bank and the bilateral development partners, by embracing a process of monitoring the outcomes to disburse funds in place of adopting a lender-wise disconnected projects approach. We have seen an unprecedented convergence of synergies in ideas and greater collective responsibility in the process of implementation, that have helped to improve governance and accountability in public financial management and helped to move towards the elimination of duplicity in procurement and spending, the ultimate responsibility of which lies with public officials. Such an approach is vital since there are many Development Partners assisting the process with different institutional priorities, and also to promote country ownership in the process of development. It is now widely recognised that failures cannot be attributed only to public officials and success cannot be achieved from initiatives mainly driven by Development Partners. Bringing all stakeholders particularly those involve in financing into a well integrated development policy framework, in which uniform systems and procedures are applied with consistent with inclusive development strategies, is the thrust of Mahinda Chinthana – the 10 year Development Framework of the Government.
To strengthen such success, the consolidation and strengthening of the financial sector is vital as the growth witnessed in the economy now demands a strong capital base and capacity to fund long term development needs. The 2014 Budget announced a landmark initiative in this direction by proposing a merger of the two Development Banks which was set up in 1955 and 1979 with the active involvement of the Central Bank and the Government, but later moved towards commercial banking due to exhaustion of concessional funding. This consolidation will be suitably extended to cover other banks and finance companies to strength the performance of the sector.
Role of banks in development
While admiring the progress in the Banking sector in terms of branch network expansion as well as entry of new banks, foreign currency operations, institutional diversification and development of financial instruments, Dr. Tilakaratna in 1983 as Secretary to the Treasury and a Member of the Monetary Board, delivering the Second Anniversary Lecture of the Rural Banking and Staff Training College of the Central Bank, on the Role of Banks in Development, argued that despite small sector growth and employment potentials, commercial banks continue to be averse to finance higher risks ventures that are usually associated with that sector in the country.
Benefiting from his research exposure during doctoral studies, the experience he commanded having served at the Central Bank and probably with a degree of frustration as the Secretary to the Treasury for not being able to sustain the growth momentum created in the immediate aftermath of 1977 economic reforms, he argued in that presentation that “criteria of assessment for lending must be efficiency and viability of operation rather than collateral on offer. In addition, one of the important elements of banking is to assist in the growth of entrepreneurs. Commercial banks in Sri Lanka have not been quite alive to these challenges. This may well be due, on the one hand, to lack of technical expertise in assessing the potential of small scale operations and on the other, to lack of personal contacts with small entrepreneurs… Nobody is asking the banks to give money away. Their development role is to help bring on stream the untapped productive potential of the rural and small scale sectors… Japan and Germany provide good examples of benefits that be gained that can gain through a close and dynamic relationship between the banks and entrepreneurs. In many instances banks have been actually undertaken equity participation in sectors with growth potential.”
In these thoughts, I think there is a strong message to banks when they proceed to announce billion rupee after tax profits competitively. They should make a self – assessment on whether the underlying profits could be attributable to such efforts in operations or due to financing well protected activities. His thoughts are particularly relevant in relation to post conflict banking operations and in the present context, where banks operate on a much lower VAT and Income Tax rate after 2010 due to Government tax reforms and in the backdrop of the economy performing with improved infrastructure and a lower public sector deficits, compared to the time when Dr. Tilakaratna made such observations in 1983.
So – Governor Cabraal, it appears that the Government initiatives are in the right direction and your firm commitment towards these reforms should pay dividend to the country and bring satisfaction to Central Bankers. The successful consolidation of nine Regional Development Banks to make one strong RDB Bank in 2008, dedicating it primarily to women entrepreneurs in 2014, amalgamation of seven Government agencies involved in rural development having created the Divi Naguma Development Department and strengthening micro financial institutions are some of the steps taken to improve the rural economy. Banking and financial institutions are given a lower tax rate in the backdrop of consolidating Investment Fund operations towards long term lending. Banks are also permitted to raise foreign funds for financing exports, tourism, energy and water efficient technologies in production. The Government is also geared to obtain investment grade in relation to country’s credit risks, in support of these initiatives while also targeting to improve its position in the Doing Business Index – to the 30th in the rank.
In spite of all these policy related measures, only little will be achieved unless banks deploy skilled staff to shoulder responsibilities. Let me again quote Dr. Tilakaratna who argued, that “it is not sufficient for only the bank staff to be educated. They in turn must educate their customers, particularly the ‘small man’… I must stress the fact that very little can be achieved in terms of banking development without a program to develop the skills of the staff as well as the skills of the clients. The staff for their part must become an integral part of the community in which they operate. Staff must perceive themselves to be catalysts for growth and development.”
Rural agricultural economy
The cornerstone of the contemporary development thrust lies with the rural agricultural economy, for obvious reasons. First, nearly two thirds of the population lives in the rural agrarian setting. Second, it helps in managing the urban-rural balance in terms of equity concerns. Third, country’s vast and diversified agricultural resources in food, livestock, fisheries, forestry and wildlife can be productively tapped only through a well-designed rural development strategy.
The Government strategy envisages a transformation of Sri Lanka from a net food importer status to a net food exporter status through technology application, agricultural research on seeds and planting material and productivity development in major crops. A decisive structural shift in food crops, poultry, diary and milk and sugar production towards strengthening food security, provision of raw material for the food and beverage industry, increased demand for light engineering and medium technology based industrialisation, marketing, storage and logistic support, is expected to take place in the rural economy to improve the value chain. Last, but not least, it can still support strong backyard household economies, livelihood opportunities, employment and balance of payments support.
Underpinning this overall rural centric strategy, it is important to strengthen the deep rooted institutional mechanisms that have withstood the test of time in rural areas such as Kanna Meetings facilitating cultivation and water management, Sathi Polas that helps least cost intermediary involvements to sell produce, youth and women organisations for sports and community based micro financing arrangements, death societies that assist in an hour of grief with relief, so as to ensure that various organisations that undermines the social and cultural setting in the traditional agrarian society will not be permitted to infiltrate.
Rural centric approach
The rural centric approach also justifies the emphasis placed on the provision of electricity to all – a target almost achieved in many districts, access to quality drinking water, family health support and back yard economy assistance at household level all over Sri Lanka, now well known Divi Neguma program. At community level, the rural centric strategies involve the development of access roads, pre and primary schools, maternity centres and dispensaries, minor irrigation systems, water supply, community facilities and micro finance. This is known as Gama Neguma.
Enabling connectivity to small townships for secondary schools, base hospitals, markets, government services, police, etc. and enabling connectivity to large provincial cities under the Connected City Development Program have been recognised as parallel elements, to give effect to Government’s overall policy thrust of ultimately connecting the country to its export processing and tourists zones as well as internal and external markets, to maximise growth potentials.
The Government recognises that rural centric development cannot be carried out in isolation unless it is combined with an industrial development strategy that take Sri Lanka from low technology and unskilled labour intensive industries to low and medium technology industrial stage while pushing apparel, tea exports etc. to high value markets. The incentive structure is being reengineered towards encouraging IT and related industries, light engineering and machinery, boat building and auto parts manufacturing activities. The forthcoming Sri Lanka China FTA is a further step in this direction to complement larger Indian and Pakistan FTAs.
I am sure that nobody will disagree with me if I say that no meaningful and balance development is possible in Sri Lanka until and unless the rural population is made more productive. This objective is unattainable without the expansion of irrigation, electricity, water, education, health, public services, marketing and banking.
Inclusive development
In conclusion, I may note that the contemporary thrust of Government’s Development strategy is based on recognition that the Government should create a climate that allows businesses of all scales to thrive, which in turn will create gainful jobs including production and self employment to all, and the Government will extended all physical and institutional infrastructure required while promoting competition. Our own country experience since independence and the thoughts of eminent economists and administrators like Dr. W. M. Tilakaratna, no doubt support inclusive development. The role of the political leadership and technocrats is to ensure that the process of development is made inclusive to the best extent possible. Integrating the rural economy, small enterprises and vulnerable groups into this process will no doubt remain to be a challenge, as markets failures are frequent in these areas and the so called efficiency in bureaucracy is also not there. This demands the Government machinery and the service delivery mechanism to be strong and active. Inclusive development also demands multifaceted management skills at all levels, and sound macroeconomic coordination and one aspect of development cannot be achieved on a sustainable basis at the cost of another.
Dr. Tilakaratna having served almost eight years in the Fund returned home in 1995. He served as a board member in several corporate entities including Hayleys and Vanik during his retirement. He delivered the Republic Commemorative Lecture in 1998 at the Central Bank, on Economic Priorities for the Next Decade. He recognised that achieving peace is the first priority, coupled with bringing about discipline, reorienting education, improvements in labour market flexibility and a higher retirement age, agricultural marketing and productivity, development of expressways and transport network. Further, he also believed that telecommunication facilities and power generation capacity are priority areas. This was in 1998. It was in 2009 that peace returned to the country. We could also be happy that many other areas recognised by him as priorities, have also been addressed.
What is encouraging to note is that in comparison to the first 10 years of any post independent Government and policy regime, the post 2005 policy regime has made development a reality. Our challenge is to ensure further clarity, consistency and continuity to be able to sustain the present momentum. The wants of a middle income country population are different. Hence managing monetary policy and supply side of the service economy involves different challenges.
Labour market demands, skills and reorienting education towards meeting such skills cannot be overlooked. The World Bank and ADB have endorsed Government initiatives in this direction with a substantial cost sharing arrangement. Public services and public servants needs to be more client-friendly and accountable showing their experience in managing the tsunami, the captive hostages of the LTTE, drought and flood victims, communicable and non communicable diseases, etc. The World Bank Vice President expressed satisfaction of field level progress when he visited Trincomalee. Similar views are shared by many visiting development experts including those from the WHO and other UN development agencies as well as the investor community.
What is probably lacking is that we are not projecting our success story loud and clear. Continuous refinements to policy strategies of the post 2005 period, which have worked well in this country and further a consolidation of a balance blend of the private and public sector role with special emphasis on the small sector and remaining facets of poverty in my view, will make Sri Lanka’s progress towards a $ 7,000 per capita income by 2020. An ambitious target of less than 10% poverty head count below $ 2 a day income is recognised for the medium term as the elimination of extreme poverty has been almost realised. Some may describe this as too ambitious but I would argue it is still sub optimal given the country’s recent progress.
A simple, yet dignified person
Finally, let me thank you for attentive listening. Dr. Tilakaratna’s life was not all about economics and administration. Dr. Lloyd Fernando who worked with him for long years and six years as Director, National Planning reminded me that he enjoyed travelling with him several times a year and most of those ended with wine and songs. I now realise why many men in such positions like travelling.
Dr. Tilakaratna was a simple, yet dignified person. He cared for the family, and lived a happy life with his wife Madam Chandra Tilakaratna, the two daughters and the two sons. He enjoyed his grandchildren. He maintained an excellent bond with all his relations in Matale, Wattegama, Kandy and Kurunegala. He loved to visit and spend time at his parental home at Matale.
He did not have accumulated wealth, other than his hard-earned pension. However, he was very rich in terms of ethics, integrity and moral. He was absolutely honest and sincere. Above all he was rich in kindness and love, and had a very warm heart. I remember seeing him in his final hours in hospital, where he demonstrated all his rich qualities in a subtle manner, by telling me “everything is alright”.
I thank all of you for your patient hearing.
