Wednesday July 17, 2019

Sri Lanka braced for economic reforms: Harsha

Oct 06, 2017 10:24 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - Sri Lanka has carried out difficult and long delayed reforms in political and foreign policy and has also begun key reforms in fiscal and monetary policy, though more remains to be done, Deputy Economic Policy Minister Harsha de Silva said.

"There were many different reforms were needed to be done," de Silva said responding to a query about the pace of reforms since the new administration was elected in 2015.

"Most important were political reforms we did in terms of brining democracy back, amending the constitution, setting up independent commissions and, creating the space to air your views, the right to information act etc."

The openness has already brought some results in exposing corruption, according to some observers.

In the political front a new constitution remains to be enacted, he said.

"And we have come very far," says de Silva. "No one has come this far.

"We are hopeful that petty politics will be kept behind and that leaders of political parties will emerge as men and women who make decisions for the benefit of generations to come and not for mere short term elections.

De Silva who was until recently Deputy Foreign Minister says reforms were also successfully carried out in foreign policy, repairing relations with Western nations.

By 2015 Sri Lanka had fallen out with traditional friends, was on a collision course with the UN Human Rights Commission and was facing the prospect of economic sanctions while trade concessions with the EU has been lost.

The GSP+ concessions with the EU has been restored, though there was still work to be done on the human rights front, de Silva said.

"America the will give the largest ever grant given by any foreign country ever," de Silva said in reference to work on a 500 million US dollar program with the Millennium Challenge Corporation of the US.

"The relations with India is at an all-time high."

He said relations with China has been fully restored, he said. While China is investing in Hambantota, India will get involved in Mattala Airport and also Trincomalee, where Indian Oil Corporation already operates some tanks.

"The third set of reform are economic reform and those are we have certainly begun," de Silva said.

'In term of fiscal policy reforms already the budget numbers are looking better. Revenue as a share of gross domestic product is increasing and a new Inland Revenue Act has been enacted."

Higher revenues and lower deficits are expected to reduce Sri Lanka's long term debt burden.

A disastrous interim budget in January 2015 as well as a 2016 budget presented in parliament which was full of interventions and with support to special interest groups in some cases dealt a heavy blow to the United National Party's record for economic management, according to critics.

The controversial budgets created space for the administration's coalition partner Sri Lanka Freedom Party to step in to economic policy making.

Meanwhile de Silva says a policy of moving to public private partnerships has been initiated. A PPP unit has been set up.

Monetary policy has also been improved, he said.

"The central bank has got fair degree of independence. It has been able to withstand fiscal dominance. On the foreign exchange side, we have got rid of exchange controls, and we have moved to a flexible exchange rate management."

Sri Lanka's central bank is moving to a modified inflation targeting program called 'flexible inflation targeting', though critics have warned that fundamental policy conflicts appear to be still present.

The central bank has been the weak link in Sri Lanka economic policy since its creation in 1951, due to its attempt to print money and control interest rates (when credit growth went up) while at the same time trying to control the exchange rate, which was practically impossible.

The central bank removed a 'hard budget constraint' in place during British rule allowing politicians to deficit spend easily by printing money and borrowing, without raising taxes.

The central bank then generated high inflation by depreciating the currency, helping avoid sovereign default or debt distress by imposing real haircut on pension funds which owned most of the government debt.

Some analysts say fortunately the last administration borrowed heavily in dollars, making the usual central bank trick less effective as it could not destroy the rea value of dollar debt by depreciation.

Each time the rupee depreciated foreign debt 'expanded' in nominal terms though in fact it remain the same in real terms, bringing the prospect of sovereign default closer.

The current administration is now on a path to reduce the overall budget deficit and reduce the accumulation of new debt.

De Silva says initial steps have been taken on trade reforms, with a new trade policy being published.

Sri Lanka high import taxes have also prevented export growth. Freedom advocates have also said that it is a festering problem that has allowed rent seeking domestic businesses to exploit poor consumers at will.

Cost based pricing of energy, another key reform to avoid economic instability, was ahead.

"We have prioritized the action we need to take," de Silva said. "It is now up to us to really go and implement them." (Colombo/Oct06/2017)


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