"Next Google And Facebook Could Be Developed In Sri Lanka: But They May Go Unfunded": Mangala

Following are salient points of the speech made by Finance and Media Minister Mangala Samaraweera during the second reading of the budget. 

  • When this government came into power in January 2015, Sri Lanka was a country that was desperately in need of not only political reform, but economic reform as well.
  • The political crisis that gripped the country was very clear and apparent to all citizens.
  • The inhibition of freedoms, the environment of fear, and repression was felt by everyone. What was more subtle, was the economic crisis that had been brewing for many years.
  • This economic crisis was neatly masked by glittery new infrastructure, impressive construction, and carefully presented macroeconomic data.
  • Beneath this was a structural failure of the economic model of the previous regime. Whilst post-war economic growth reached attractive statistical heights, this was driven by unsustainable fundamentals.
  • Growth was dominated by sectors such as construction, domestic retail, the financial sector, and domestic transportation.
  • These were all domestic market oriented sectors. Sri Lanka was once the most liberal and globally integrated economy in the region – but over the last decade and a half, these reforms were rolled back and today Sri Lanka is one of the most protected economies in the region, creating this inward orientation.
  • Sri Lanka’s economy was surrounded by a wall of tariffs and para-tariffs, imposed upon the whims of narrow protectionist lobby groups that thrived in an anti-competitive environment.
  • Economic inequality increased as wealth became concentrated amongst a few business cartels and corporate’s close to the regime.
  • During this period there was little or no focus on the external economy.
  • Exports collapsed from 30% of GDP in the 1990s to around 12% by 2014. FDI had come to a standstill and concentrated in a few sectors such as domestic services and real estate.

 

  • The problem was that this construction and domestic market driven economic growth was financed primarily by expensive external commercial borrowings by the then government.
  • The economy was accumulating external liabilities in the form of foreign debt repayments, whilst its foreign earnings were dwindling all the time.
  • It was like taking a US dollar loan to build your house, while your salary was in rupees. You would never generate dollars to repay the loan.
  • In many instances such as Mattala, these foreign debt funded investments generated zero returns, let alone Dollar returns.
  • To make matters worse, during this period Sri Lanka’s government revenue also collapsed amidst a plethora of exemptions, tax holidays, and irresponsible fiscal management.
  • When our government came to power, government revenue to GDP was around 11% - easily the lowest in our region and amongst the lowest in the world.
  • Sri Lanka’s economic structure was characterised by rising external debt, falling revenue, and flat foreign exchange earnings.
  • It was a matter of time before this failing economic model collapsed.

 

Stabilising the Economy

  • It was in this context that our government came to power in 2015. Our first actions were to provide relief to a public that had been saddled with numerous economic burdens.
  • We eased prices for a number of products, relaxed monetary and fiscal conditions and gave respite to a struggling populace. Since then we have gone about stabilising the economy.
  • A series of significant fiscal reforms were undertaken, most recently the Inland Revenue Act.
  • Revenue has accordingly increased from 11% of GDP to 14.6% of GDP – a remarkable achievement for such a short period of time.
  • We are now on the cusp of a current account surplus in the budget for the first time in decades.
  • External reserves have stabilised after being decimated by the significant external debt repayments that had to be made to service the debts of the previous regime.
  • The confidence of global markets has returned as indicated by the spike in foreign investments in debt and equity markets this year.

 

Ready for Growth

  • Macroeconomic conditions have now by and large stabilised and the economy is ready to take off once again.
  • But this economic take-off cannot happen in the same unsustainable manner as soon after the war.
  • We can’t create artificial demand stimulus and given the accumulated debt, there is limited fiscal space to engage in a public investment drive.
  • The only avenue for sustainable growth is through private investment and the external sector.
  • It is in this context that I set about the task of designing this Budget.
  • My task in doing so was clear.
  • We had to set about developing an economy where growth is driven by private investment and an economy which generates foreign inflows through exports and FDI to finance our emerging external debt obligations.

 

Legislative Reforms to Fast Track Liberalisation

  • This is why it is essential that we go about fast tracking liberalisation.
  • We identified the key constraints and bottlenecks to investment – both domestic and foreign.
  • Prime amongst these constraints include limitations in access to affordable and productive land, labour, and capital.
  • There are vast tracts of land in the country that are tied up in completely unproductive use or are in fact abandoned.
  • The land legislative reforms we propose are with a view to freeing up this unproductive or unused land for productive use for investment, for enterprise.
  • This will in no way undermine the land rights of citizens. Today our farmers are not free to produce the crops that yield them optimal returns.
  • We want these reforms to empower our farmers to have the flexibility to produce the crops that give them the best returns.
  • In doing so, we will of course be sensitive to issues of food security, the environment, and land rights.
  • Today’s labour laws dictate and restrict working hours of our women and men. They do not reflect modern working conditions including technological innovations that enable work from home or remote work.
  • Our labour laws do not even include most contemporary jobs. We intend to modernise these laws to enable our men and women to have more choice in their working conditions and how they work.
  • This will make it easier for companies to hire people and create jobs. In these labour market legislative changes we will in no way undermine the rights of the worker and dignity of labour.
  • We will empower our workers with more freedom and more choice.
  • Our capital markets have miserably failed our SMEs and entrepreneurs.
  • A young entrepreneur with an exciting innovation will struggle to find a financial institution who will lend him or her money without asking an arm and leg in collateral.
  • The next Google or Facebook could be developed in Sri Lanka, but in today’s capital market, it will probably go unfunded.
  • This is why we need reform – we need to fix systems that are not working.
  • The Enterprise Sri Lanka credit scheme, the SME guarantee fund, the Development Bank, will work together to mend our dysfunctional capital markets. This is the kind of reform I intend to drive in this Budget.
  • Capital market liberalisation does not mean unfettered opening up of markets. In the past, successive government’s role in financial markets has been in owning and operating numerous banks and financial institutions.
  • Most of these have failed to provide access to affordable capital for our SMEs and entrepreneurs.
  • The role of the government ought to be in setting the institutions and rules of the game whilst regulating the market to ensure competition, fairness, and social equity.
  • The business of government is not in doing business. This is especially so when the government’s legacy in running SOEs is an accumulated debt of Rs. 1.4 trillion.
  • Sri Lanka must move on from the shackles of excessive state controls and return to its roots of vibrant free enterprise.

 

 

 

 

Empowerment

  • Our history is rich with success as a nation of free enterprise. It is only in recent years that we have retreated into an inward looking, state centric economy.
  • Those who have succeeded in recent times are those who have had access to power, access to networks and connections. Wealth has been concentrated amongst a privileged few.
  • Meanwhile, today’s youth await for a government job or for some form of handout to make ends meet.
  • Through this budget we aim to change that mindset by empowering all Sri Lankans to take their future into their own hands. This is the agenda of Enterprise Sri Lanka.
  • We have allocated significant amounts of money in upgrading the quality of education, providing extensive market oriented skill development schemes through the 13 years of education programme and technical and vocational training institutions.
  • In this Budget we have recognized those students who may not get through their Advanced Levels and may not get access to our limited places in state universities.
  • This number of over 250,000 students per year, is left with limited options due to no failing of their own, but due to a failing of our education system.
  • The extensive reforms proposed in this budget will equip our talented youth with the skills and capabilities to thrive in Enterprise Sri Lanka.
  • It is these youth that will one day form the tech based start ups and the innovative agri-business ventures, which will drive the investment, Sri Lanka so badly needs.

 

 

External Orientation

  • I am certain that this next generation of Sri Lankan entrepreneur will not be clamoring for protection and insulation from competition.
  • They will be equipped with skills, access to knowledge and technology, and will most importantly have the self-belief and confidence to take on the world and win.
  • This environment of healthy, fair, competition will bring out the best in us; it will drive innovation and drive development.
  • Through this budget we want to create the platform to empower Sri Lankan business to enter global value chains and compete in global markets.
  • Towards this end we have proposed significant investments in encouraging the export sector.
  • More than 20% of our exports are agricultural exports and the Budget provides significant support to this sector.We need to empower our farmers to move beyond our limited domestic market and venture into global value chains.
  • Funds are allocated to develop tea, rubber, coconut, vegetables & fruits, and the fishing industry as well.
  • Allocations are also set aside to support Research & Development in the agricultural sector along with tariff removals for imports of high-tech agri equipment to enable more value added agri-exports.

 

Trade Liberalisation

  • In spite of the numerous measures proposed to enhance our exports, these are unlikely to yield results unless we address the structural problem in Sri Lanka’s economy.
  • After the economic liberalisation of 1977, and second generation reforms in the early 1990s, successive governments have systematically rolled back these reforms.
  • We have become one of the most protectionist economies in the region with an array of tariffs and para-tariffs.
  • In addition to driving up the cost of living and the cost of doing business, these tariffs have resulted in creating an anti-export bias and diverting economic resources to the non-tradable sector.
  • It is no wonder then that our exports have collapsed in the last two decades.
  • It is in this context that we have embarked on a systematic trade liberalisation agenda in this budget.
  • We announced the immediate removal of 1,200 para tariffs as a starting point. This is a major reform.
  • However, rest assured that these reforms are not being initiated in a vacuum. The government has identified a core negative list of products, including sensitive agricultural and rural industry products, which will not be subject to the same liberalisation programme.
  • We are bringing in legislation to prevent unfair trading practices, and robust Anti-Dumping, Countervailing, and Safeguards laws are in the final stages of enactment.
  • Together with strengthened Consumer Protection laws, Sri Lanka will have the legislative framework to address any negative fallout from trade liberalisation efforts.

 

A Competitive Economy

  • It is clear that whilst we go about removing the fetters to free enterprise, we are conscious of the need to protect the vulnerable and disadvantaged.
  • But we will not provide open ended protection to entrenched vested interests at the cost of consumer welfare and economic dynamism.
  • I am disappointed to note that some among Sri Lanka’s established capitalist class are afraid of competition, in spite of being in business for decades, and in some cases over a century.
  • They lack the same self-belief and confidence of Sri Lanka’s emerging entrepreneurs who quite rightly believe they can take on the world and win, particularly in their own backyard.
  • Whilst some among us dwell in a mistaken ideology, quoting Deng Hsiao Peng and Ho Chi Ming, these very countries are embracing reform and modernisation.
  • Just two days ago Chinese Vice Premier and Politburo Member Wang Yang said,
  • “The traditional development model has hit a bottleneck. Domestic and international trends facing economic opening are undergoing deep and complex changes. The opportunities and challenges are unprecedented, but the opportunities are greater than the challenges. China should compete for global capital not by offering preferential policies, but by creating a fair, transparent, law-based and predictable business environment. China must also protect intellectual property, not require technology transfer as a condition of gaining market access, and should treat domestic and foreign firms equally in government procurement. China would focus on orderly opening of the financial, education, culture, and health care industries, while lowering market entry limitations on e-commerce, logistics, early childhood education and elderly care.”
  • In Viet Nam, economic liberalisation reforms led by former Prime Minister Nguyen Tan Dung have transformed Vietnam into one of the most attractive emerging economies in Asia.
  • This included the lifting of restrictions on foreign investment and the negotiation of several trade deals, notably the prospective Trans-Pacific Partnership (TPP) and a free-trade agreement with the European Union.
  • As a result of these liberalisation reforms, FDI in Vietnam reached record levels in 2015, rising more than 40 percent in the first three quarters of the year compared to the previous year.
  • Vietnam is in the process of privatizing a number of SOEs, making the state more of a facilitator as opposed to a business player.

Conclusion

  • In conclusion, it is clear that the path of economic liberalisation, individual empowerment, and enhancement of economic freedoms, is not a question of ideology.
  • Given the inherited structural flaws in an economy dominated by domestic market activity, financed by external debt, with collapsing government revenue and exports, there is no choice but to embark on a path of economic liberalisation to unleash investment, entrepreneurship, and exports.
  • In this budget we have proposed a remedy to a failed economic model.
  • This budget will empower Sri Lanka’s SMEs and entrepreneurs, it will inculcate our youth with knowledge, skills, and technology to take on the world and win.
  • With this budget we launch Enterprise Sri Lanka. I look forward to all of your support in making it a success.
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