Sri Lanka’s economy looks forward to grow
2010-01-25
Q: Governor, what could you say about the economic development that country has gained during the past four years?
A: There has been a tremendous economic growth during the past four years in the country. When you say an economic growth there are some economic indicators such as per capita income, inflation, employment, poverty, reserves and infrastructure development.
Kerawalapitiya Power Plant
It took Sri Lanka 55 years to reach a per capita income of US$ 1,000 and during the last four years the Central Bank doubled it, which indicates a clear progress while increasing the country’s GDP by 100 percent. Sri Lanka recorded a remarkable growth during the past four years, while maintaining a continuous growth.
The growth was better every year comparatively to the corresponding previous year.
Inflation differed with an average of about 11 percent for the past 30 years and with that liberation of the country the inflation dropped to three percent recording a single digit after over 25 years.
Our reserves, which recorded a maximum of US$ 2.5 billion earlier has grown at present more than US$ 5 billion signifying the excellent response from foreign investors, soon after the establishment of peace. The debt market, treasury bills and treasury bond markets have responded outstandingly.
The unemployment rate, which was around 8 to 9 percent few years ago has dropped to six percent and the country’s infrastructure development has been going on the fastest ever in the history.
All major projects were launched while the conflict raged such as five harbours, one international airport, 14 domestic airports, Moragahakanda major irrigation project, two major power plants, expand in road network, village tank developments and expansion of electricity coverage.
In 2005 electricity coverage which was 75 percent and today it has covered up to 87 percent and the idea of the Government is to make it 100 percent in next two years. Poverty, which was 22 percent has come down to 15 percent last year.
This year, we hope to reduce the poverty to 10 percent and we intend to make it to two percent by the end of 2016.
In every aspect there has been tremendous scope particularly with the end of war. What is significant was that even during the war development took place rapidly in every nook and corner of the country.
The path was cleared a progressive economy while fighting the war and today we have come to a very important stage in our history where all the negatives have been removed. As a result recently the New York Times had said that Sri Lanka is the best place to visit in 2010, Wall Street Journal had said that Sri Lanka will be one of the top ten countries for growth this year and the IMF has said that we are no longer a poor country, that we are a middle income state.
The outlook of the country has been changed over the past four years to a positive image and that is one of the reasons for the rest of the world to rate the country in this manner.
Q: Does the country highly depend on foreign funds and aid?
A: If we want to develop rapidly we have to borrow and use that money now to develop the infrastructure and out of the money that we gain we pay off. What is important is to see that your income is sufficient to pay the loan. For a country the assessment is debt to GDP ratio as against how much is your debt. In 2002 the debt was more than the GDP, which was 104 percent when the GDP was 100 percent, but today the debt is 84 percent and the GDP is 100 percent.
It has been growing so that we are managing it much better than before and that is one of the reasons that the IMF has rated us as a middle-income country. We have a sustainable and a manageable debt. We are borrowing to develop.
The previous Government borrowed money not to build bridges or to build power plants, but to import wheat flour and for consumption. We have more than US$ 500 million of loans that we are paying now for the bread that we ate in the past.
Q: The opposition is complaining that the Central Bank is injecting money to the economy without a control on its supply and demand. What is your view?
A: We have to inject a certain amount of money because otherwise the economy cannot move, but we do it scientifically. We inject only what is needed for the economy to progress and that is done with great responsibility, which the Central Bank is entrusted to do.
We do it in an orderly manner and that is one of the reasons that we have been able to bring down inflation and ensure economic stability, when the whole world was going through difficulties. None of the banks in Sri Lanka collapsed and we are proud to say that it was because we managed it well.
Opposition has risen certain allegations on some infrastructure projects such as Kerawalapitiya power plant, Uma Oya project and the Weerawila airport.
Q: What was the actual cost of the Kerawalapitiya power plant?
A:The cost of the Kerawalapitiya Power Plant was originally estimated in 2002 as US$ 390 million. However, due to careful planning and execution, the cost of the project is now estimated to be only about US$ 295 million for the power plant of 300 megawatts when fully completed. That works out to roughly about a million US$ per megawatta.
That is satisfactory as it is close to the current industry norm of about US$ one million per megawatt for petroleum based thermal power plants. The Kerawalapitiya plant is a combined power cycle plant.
The first 200 megawatts is generated with furnace oil. The exhaust from the first phase is to be converted into steam to generate another 100 megawatts. The first phase is already in operation and the second phase will be operational soon, in a matter of a few days. The cost of setting up this plant will thus be distributed over the entire 300 megawatts.
Q: Did the estimated cost of Uma Oya project increase?
A: The structure of a project can change from time to time based on the project components. There may be add-ons by the time a project is finalized, and it may even have certain components that are dropped by that time. The original project had an irrigation as well as power generation component and the estimate of the project amounted to US$265 million based on input prices in 1999.
The Uma Oya project at that time, was meant to produce 50 megawatts of hydropower and irrigate around 5000 acres of paddy land. Later, the project scope was expanded and the hydropower generation capacity was increased to 120 megawatts and the irrigation scope to 12,500 acres of paddy. As a result of such add-ons, the project cost has been re-estimated at US$545 million in 2009 prices.
It is generally estimated that the capital cost to produce one megawatt of hydroelectricity is about US$ three million. In fact, for the Upper Kotmale project, which aims to produce 150 megawatts, the project cost is US$460 million. When all those factors are taken into account, the increase in the project cost of the Uma Oya is reasonable and there is ample justification for the increased project cost.
The Export Development Bank of Iran funds the financing for the Uma Oya project. Usually, the agreement in such cases is that the contract has to be handed over to a company from the country providing the financing.
The general practice under the bilateral loan agreements is that construction contracts are awarded to a contractor of the lending country has been followed here too. However, having identified the contractor, the Government has taken the necessary measures to ensure the project is cost effective. In fact, the Government has been able to negotiate and enter into the contract at a lower price than the estimated value.
At the same time, any unexpected costs and adverse movement in prices will also have to be borne by the contractor and no additional payments need to be met by the Government.
Q: Did the feasibility study for the Weeravila airport cost Rs 500 million?
A: That is completely untrue. According to the information we have, the Airport and Aviation Services has spent just Rs nine million million (not 500 million) for the initial work relating to the Weerawila airport.
This includes the Environmental Impact Assessment (EIA) as well. In any major project, an Environmental Impact Assessment has to be done. Once the EIA was completed, and the location was found to be not suitable, the project was shifted to Mattala. There is nothing unusual in this. A location has to be studied to determine whether it is suitable for such a project.
Q: Purchasing and selling of gold by the Central Bank been highly criticized by the Opposition. As the Central Bank Governor what is your opinion of this and how important is it for a country to have gold as a reserve?
A: Earlier the opposition was shouting that the Central Bank was bankrupt and we were selling gold. After that they were upset when Central Bank purchased gold.
When there is a income you will buy gold and if not you will sell gold. But Central Bank did not sell gold even at a crucial time, but we bought gold to have certain anchor. Because of this even at a difficult time we will have these gold as tangible assets backed with real value and we believe purchasing gold is a correct decision.
Q: Military forces found a huge amount of gold, which was belong to the LTTE. What has happened to it?
A: Any gold or any asset when it has to be vested in the state there is a certain procedure to be followed. Because policeman found a golden bangle or even gold captured by the forces the Central Bank cannot easily take it since there is a legal procedure and courts need to declare it. Even some accounts, which had TRO funds have been seized with a court order. The gold been captured during the JVP period had also been handed over by the courts and then it was added to our reserves.
Q: What is the true story behind the hedging deal of Ceylon Petroleum Corporation?
A: In this hedging deal the total amount that the five banks have claimed from the Ceylon Petroleum Corporation amounts to US$418 million. This amounts to about Rs 47 billion and not Rs 230 billion. In this case of the hedging transactions, there are certain norms to ensure that such transactions are structured in a proper, orderly manner.
In many countries it has been found that certain hedging deals have not been structured properly. For example, in China, Korea and India, there have been instances of mis-selling and there was no liability at all established in relation to claims that were made by various banks.
The Central Bank looked into the transactions entered into by the CPC and the banks, and after a detailed investigation, we have made a very clear determination that these transactions have not been structured properly, and that these transactions are tainted, and accordingly should not be given effect to.
There is no money due to be paid by the CPC, but that is not to say that the banks cannot make claims. If an accident occurs, claims can be made from the insurance company, but the insurance company may find that something is not right, in which case, they are not obliged to make the payment. In this instance, the Central Bank has determined that the transactions are tainted, and the CPC is not obliged to pay. So nothing has been paid as alleged neither will any such payment be made.
It was certainly not Rs 230 billion or even Rs 47 billion. Further, I also know that the Attorney General is defending the CPC in arbitration proceedings abroad, and he is confident that the country will not have to pay any money at all.
Q: There was Rs 35 billion VAT fraud. What is this VAT fraud?
A: This fraud happened during the period, November 2002 to December 2004 before President Mahinha Rajapaksa was elected and became Finance Minister. The amount involved is not Rs 35 billion but Rs 3.5 billion. Action has been filed against those involved.
Q: Has Mihin Lanka made a Rs 4 billion loss?
A: This Rs 4 billion is the total capital investment of this project, which is a very modest capital for an airline. You need a initial capital to commence a business and the Government has made an initial capital investment of Rs 4 billion for Mihin Lanka and this is not a loss that airline has made. Over a period of time the company will make money.
Even a grocery business will take some time to make profits. In any business you need to build the clientele and processors right to make profit. Normally airlines take at least five years to make profits. This is not a project that will give profits as soon as you start business. But now we have seen a break even at Mihin Lanka and over a period of time it will generate profits. People should not mix up the Mihin Lanka capital investment with a loss.
Q: SriLankan Airlines also made losses what can you say about this?
A: This happened not only to SriLankan Airlines. Last year not a single airline made profits due to the recession. Japanese Air Lines had a bankrupt, British Airways and Singapore Airlines also made losses.
High fuel prices and less air passenger traffic had negative impact on the airline business. In addition to all the global issues, Sri Lankan airlines had to face more challenges. In the latter part of the year there were less people coming in because the conflict escalated. Also, the decline in tourist arrivals due to travel advisories being issued by certain countries also affected the airline. When all these matters put together, made the airline suffer a loss. However, when the global situation eases, the profitability of SriLankan Airlines should improve. But now SriLankan Airlines is bouncing back to normalcy.
Q: What can you say about the Golden Key and Sakvithi credit fraud?
A: In each of those there has been shown developments, even though we are not directly responsible. President Mahinda Rajapaksa has given a clear indication that he would intervene to safeguard the depositors in whatever way possible.
So there are certain matters, which are in Courts so we need to respect the judgements of the Court and ensure that we do not do anything against those. Within those limits there are things to be done. Once all the assets are identified and free from encumbrances the Government will take over the assets and pay them so that there will not be any delay.
There are other complications where the assets are not free. Currently we have engaged qualified and experienced firms who are now advising, as to how this should be solved because there are various complications and we have to unravel them. This audit firm will examining it and sorted it out. The Government is presently considering the issue of treasury bonds to the value of net assets transferred in settlement of dues.
Q: Last week Sri Lanka was promoted to a middle-income state. How will this impact on the economic growth?
A: There will be major positive feelings that will be catered. Actually the economy is working on confidence, on good feelings and on certain macroeconomic fundamentals. As much as the macroeconomic fundamentals are important the good feelings as well as positive feature of a economy are important.
So this graduation of Sri Lanka to a middle-income market emerging country gives it a new light. Out of all the countries in the world about 80 countries is termed low-income countries and we were in that lot earlier.
The way people deal with Sri Lanka is different. If you’re in a high network or a middle network the way the people are treating you is different from the low network. So when Sri Lanka moves to the next stage we will be projected as a country, which will have a different outlook.
Q: Sri Lanka recorded a single digit inflation rate after 25 years. How did the country gain a single digit inflation rate?
A: Managing inflation is a longtime process. So for 20 months we used several instruments that we used to bring down the inflation rate to a single digit rate.
We kept interest rates at a high level, aggressive open market operations, reserves money very diligently through all these mechanisms we maintained the target that we had, we gave clear information to the market that the inflation will not rise.
At present we have come to a reasonable level of inflation and we will ensure that we will not get this out of hand at anytime. We think that it was due to sacrifice and hard work and with an overall expectation people will think that the country will grow.
A: There has been a tremendous economic growth during the past four years in the country. When you say an economic growth there are some economic indicators such as per capita income, inflation, employment, poverty, reserves and infrastructure development.
Kerawalapitiya Power Plant
It took Sri Lanka 55 years to reach a per capita income of US$ 1,000 and during the last four years the Central Bank doubled it, which indicates a clear progress while increasing the country’s GDP by 100 percent. Sri Lanka recorded a remarkable growth during the past four years, while maintaining a continuous growth.
The growth was better every year comparatively to the corresponding previous year.
Inflation differed with an average of about 11 percent for the past 30 years and with that liberation of the country the inflation dropped to three percent recording a single digit after over 25 years.
Our reserves, which recorded a maximum of US$ 2.5 billion earlier has grown at present more than US$ 5 billion signifying the excellent response from foreign investors, soon after the establishment of peace. The debt market, treasury bills and treasury bond markets have responded outstandingly.
The unemployment rate, which was around 8 to 9 percent few years ago has dropped to six percent and the country’s infrastructure development has been going on the fastest ever in the history.
All major projects were launched while the conflict raged such as five harbours, one international airport, 14 domestic airports, Moragahakanda major irrigation project, two major power plants, expand in road network, village tank developments and expansion of electricity coverage.
In 2005 electricity coverage which was 75 percent and today it has covered up to 87 percent and the idea of the Government is to make it 100 percent in next two years. Poverty, which was 22 percent has come down to 15 percent last year.
This year, we hope to reduce the poverty to 10 percent and we intend to make it to two percent by the end of 2016.
In every aspect there has been tremendous scope particularly with the end of war. What is significant was that even during the war development took place rapidly in every nook and corner of the country.
The path was cleared a progressive economy while fighting the war and today we have come to a very important stage in our history where all the negatives have been removed. As a result recently the New York Times had said that Sri Lanka is the best place to visit in 2010, Wall Street Journal had said that Sri Lanka will be one of the top ten countries for growth this year and the IMF has said that we are no longer a poor country, that we are a middle income state.
The outlook of the country has been changed over the past four years to a positive image and that is one of the reasons for the rest of the world to rate the country in this manner.
Q: Does the country highly depend on foreign funds and aid?
A: If we want to develop rapidly we have to borrow and use that money now to develop the infrastructure and out of the money that we gain we pay off. What is important is to see that your income is sufficient to pay the loan. For a country the assessment is debt to GDP ratio as against how much is your debt. In 2002 the debt was more than the GDP, which was 104 percent when the GDP was 100 percent, but today the debt is 84 percent and the GDP is 100 percent.
It has been growing so that we are managing it much better than before and that is one of the reasons that the IMF has rated us as a middle-income country. We have a sustainable and a manageable debt. We are borrowing to develop.
The previous Government borrowed money not to build bridges or to build power plants, but to import wheat flour and for consumption. We have more than US$ 500 million of loans that we are paying now for the bread that we ate in the past.
Q: The opposition is complaining that the Central Bank is injecting money to the economy without a control on its supply and demand. What is your view?
A: We have to inject a certain amount of money because otherwise the economy cannot move, but we do it scientifically. We inject only what is needed for the economy to progress and that is done with great responsibility, which the Central Bank is entrusted to do.
We do it in an orderly manner and that is one of the reasons that we have been able to bring down inflation and ensure economic stability, when the whole world was going through difficulties. None of the banks in Sri Lanka collapsed and we are proud to say that it was because we managed it well.
Opposition has risen certain allegations on some infrastructure projects such as Kerawalapitiya power plant, Uma Oya project and the Weerawila airport.
Q: What was the actual cost of the Kerawalapitiya power plant?
A:The cost of the Kerawalapitiya Power Plant was originally estimated in 2002 as US$ 390 million. However, due to careful planning and execution, the cost of the project is now estimated to be only about US$ 295 million for the power plant of 300 megawatts when fully completed. That works out to roughly about a million US$ per megawatta.
That is satisfactory as it is close to the current industry norm of about US$ one million per megawatt for petroleum based thermal power plants. The Kerawalapitiya plant is a combined power cycle plant.
The first 200 megawatts is generated with furnace oil. The exhaust from the first phase is to be converted into steam to generate another 100 megawatts. The first phase is already in operation and the second phase will be operational soon, in a matter of a few days. The cost of setting up this plant will thus be distributed over the entire 300 megawatts.
Q: Did the estimated cost of Uma Oya project increase?
A: The structure of a project can change from time to time based on the project components. There may be add-ons by the time a project is finalized, and it may even have certain components that are dropped by that time. The original project had an irrigation as well as power generation component and the estimate of the project amounted to US$265 million based on input prices in 1999.
The Uma Oya project at that time, was meant to produce 50 megawatts of hydropower and irrigate around 5000 acres of paddy land. Later, the project scope was expanded and the hydropower generation capacity was increased to 120 megawatts and the irrigation scope to 12,500 acres of paddy. As a result of such add-ons, the project cost has been re-estimated at US$545 million in 2009 prices.
It is generally estimated that the capital cost to produce one megawatt of hydroelectricity is about US$ three million. In fact, for the Upper Kotmale project, which aims to produce 150 megawatts, the project cost is US$460 million. When all those factors are taken into account, the increase in the project cost of the Uma Oya is reasonable and there is ample justification for the increased project cost.
The Export Development Bank of Iran funds the financing for the Uma Oya project. Usually, the agreement in such cases is that the contract has to be handed over to a company from the country providing the financing.
The general practice under the bilateral loan agreements is that construction contracts are awarded to a contractor of the lending country has been followed here too. However, having identified the contractor, the Government has taken the necessary measures to ensure the project is cost effective. In fact, the Government has been able to negotiate and enter into the contract at a lower price than the estimated value.
At the same time, any unexpected costs and adverse movement in prices will also have to be borne by the contractor and no additional payments need to be met by the Government.
Q: Did the feasibility study for the Weeravila airport cost Rs 500 million?
A: That is completely untrue. According to the information we have, the Airport and Aviation Services has spent just Rs nine million million (not 500 million) for the initial work relating to the Weerawila airport.
This includes the Environmental Impact Assessment (EIA) as well. In any major project, an Environmental Impact Assessment has to be done. Once the EIA was completed, and the location was found to be not suitable, the project was shifted to Mattala. There is nothing unusual in this. A location has to be studied to determine whether it is suitable for such a project.
Q: Purchasing and selling of gold by the Central Bank been highly criticized by the Opposition. As the Central Bank Governor what is your opinion of this and how important is it for a country to have gold as a reserve?
A: Earlier the opposition was shouting that the Central Bank was bankrupt and we were selling gold. After that they were upset when Central Bank purchased gold.
When there is a income you will buy gold and if not you will sell gold. But Central Bank did not sell gold even at a crucial time, but we bought gold to have certain anchor. Because of this even at a difficult time we will have these gold as tangible assets backed with real value and we believe purchasing gold is a correct decision.
Q: Military forces found a huge amount of gold, which was belong to the LTTE. What has happened to it?
A: Any gold or any asset when it has to be vested in the state there is a certain procedure to be followed. Because policeman found a golden bangle or even gold captured by the forces the Central Bank cannot easily take it since there is a legal procedure and courts need to declare it. Even some accounts, which had TRO funds have been seized with a court order. The gold been captured during the JVP period had also been handed over by the courts and then it was added to our reserves.
Q: What is the true story behind the hedging deal of Ceylon Petroleum Corporation?
A: In this hedging deal the total amount that the five banks have claimed from the Ceylon Petroleum Corporation amounts to US$418 million. This amounts to about Rs 47 billion and not Rs 230 billion. In this case of the hedging transactions, there are certain norms to ensure that such transactions are structured in a proper, orderly manner.
In many countries it has been found that certain hedging deals have not been structured properly. For example, in China, Korea and India, there have been instances of mis-selling and there was no liability at all established in relation to claims that were made by various banks.
The Central Bank looked into the transactions entered into by the CPC and the banks, and after a detailed investigation, we have made a very clear determination that these transactions have not been structured properly, and that these transactions are tainted, and accordingly should not be given effect to.
There is no money due to be paid by the CPC, but that is not to say that the banks cannot make claims. If an accident occurs, claims can be made from the insurance company, but the insurance company may find that something is not right, in which case, they are not obliged to make the payment. In this instance, the Central Bank has determined that the transactions are tainted, and the CPC is not obliged to pay. So nothing has been paid as alleged neither will any such payment be made.
It was certainly not Rs 230 billion or even Rs 47 billion. Further, I also know that the Attorney General is defending the CPC in arbitration proceedings abroad, and he is confident that the country will not have to pay any money at all.
Q: There was Rs 35 billion VAT fraud. What is this VAT fraud?
A: This fraud happened during the period, November 2002 to December 2004 before President Mahinha Rajapaksa was elected and became Finance Minister. The amount involved is not Rs 35 billion but Rs 3.5 billion. Action has been filed against those involved.
Q: Has Mihin Lanka made a Rs 4 billion loss?
A: This Rs 4 billion is the total capital investment of this project, which is a very modest capital for an airline. You need a initial capital to commence a business and the Government has made an initial capital investment of Rs 4 billion for Mihin Lanka and this is not a loss that airline has made. Over a period of time the company will make money.
Even a grocery business will take some time to make profits. In any business you need to build the clientele and processors right to make profit. Normally airlines take at least five years to make profits. This is not a project that will give profits as soon as you start business. But now we have seen a break even at Mihin Lanka and over a period of time it will generate profits. People should not mix up the Mihin Lanka capital investment with a loss.
Q: SriLankan Airlines also made losses what can you say about this?
A: This happened not only to SriLankan Airlines. Last year not a single airline made profits due to the recession. Japanese Air Lines had a bankrupt, British Airways and Singapore Airlines also made losses.
High fuel prices and less air passenger traffic had negative impact on the airline business. In addition to all the global issues, Sri Lankan airlines had to face more challenges. In the latter part of the year there were less people coming in because the conflict escalated. Also, the decline in tourist arrivals due to travel advisories being issued by certain countries also affected the airline. When all these matters put together, made the airline suffer a loss. However, when the global situation eases, the profitability of SriLankan Airlines should improve. But now SriLankan Airlines is bouncing back to normalcy.
Q: What can you say about the Golden Key and Sakvithi credit fraud?
A: In each of those there has been shown developments, even though we are not directly responsible. President Mahinda Rajapaksa has given a clear indication that he would intervene to safeguard the depositors in whatever way possible.
So there are certain matters, which are in Courts so we need to respect the judgements of the Court and ensure that we do not do anything against those. Within those limits there are things to be done. Once all the assets are identified and free from encumbrances the Government will take over the assets and pay them so that there will not be any delay.
There are other complications where the assets are not free. Currently we have engaged qualified and experienced firms who are now advising, as to how this should be solved because there are various complications and we have to unravel them. This audit firm will examining it and sorted it out. The Government is presently considering the issue of treasury bonds to the value of net assets transferred in settlement of dues.
Q: Last week Sri Lanka was promoted to a middle-income state. How will this impact on the economic growth?
A: There will be major positive feelings that will be catered. Actually the economy is working on confidence, on good feelings and on certain macroeconomic fundamentals. As much as the macroeconomic fundamentals are important the good feelings as well as positive feature of a economy are important.
So this graduation of Sri Lanka to a middle-income market emerging country gives it a new light. Out of all the countries in the world about 80 countries is termed low-income countries and we were in that lot earlier.
The way people deal with Sri Lanka is different. If you’re in a high network or a middle network the way the people are treating you is different from the low network. So when Sri Lanka moves to the next stage we will be projected as a country, which will have a different outlook.
Q: Sri Lanka recorded a single digit inflation rate after 25 years. How did the country gain a single digit inflation rate?
A: Managing inflation is a longtime process. So for 20 months we used several instruments that we used to bring down the inflation rate to a single digit rate.
We kept interest rates at a high level, aggressive open market operations, reserves money very diligently through all these mechanisms we maintained the target that we had, we gave clear information to the market that the inflation will not rise.
At present we have come to a reasonable level of inflation and we will ensure that we will not get this out of hand at anytime. We think that it was due to sacrifice and hard work and with an overall expectation people will think that the country will grow.
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