Sri Lanka should grow at 10 to 12-pct a year: CB Governor
COLOMBO (EconomyNext) – Sri Lanka should be looking at growing 10 to 12 percent after the war with private sector being given more space and foreign direct investment moving up, Central Bank Governor Arjuna Mahendran said.
"The economy is not growing fast enough," Mahendran told EconomyNext. "Seven, seven and a half percent is not enough for Sri Lanka. We should be growing at 10-12 percent."
He said the new administration was expected to announce a number of structural reforms that would help the economy grow at a much faster pace.
While the tax take was about 12 percent of gross domestic product, which was too low, he said there were also far too many taxes.
"Our fiscal system is a mess," Mahendran said. "So the honourable Minister (of Finance) is going to rationalize the whole system."
Under Sri Lanka’s value added tax for example there were 15 pages of exemptions, he said.
The tax system would be simplified to about 5 taxes from the current 20 that will increase the tax take to over 20 percent over several years, he said.
"To me that would be the major reform," he said. "Once the government tax system is more efficient and people find it easier to pay their taxes and the government is able to fund itself on a better footing, then you will see that the private sector will respond.
"Because they will have the slack in the financial system, will allow them to borrow and grow their own enterprises."
Shrinking budget deficits will improve investor confidence he said.
A recent reduction is fuel prices was not done with a tax cut he said, but simply by passing on falling oil prices.
In the last few years the state had crowded out the private sector by heavy borrowings with a lot of money going for infrastructure.
"Which is fine. It is good for the economy to build infrastructure and increase the capacity of the economy," Mahendran said. "But think it should not be done at the expense of private sector growth and investments.
"So now we have to re-balance it. So the growth of private credit is a sign that re-balancing is starting to happen."
Private credit started to pick up from around September 2014 after being weak or negative in the aftermath of the 2011/2012 balance of payments crisis.
"Credit has strengthened from abysmally low levels," Mahendran said. "Last year for the first half credit was barely growing at all. There was no offtake and the banks were full of liquidity.
"Now the positive thing is with the announcement of elections credit started growing. So that is a good sign. That means the private sector animal spirits are picking up. And we have to help that so that the economy will grow."
He said the government was planning a sovereign bond in February but the intention was to gradually reduce costly market borrowings over time.
Growth will be funded through a variety of sources supplemented by bi-lateral and multi-lateral financing.
"We will look at the financial markets, the bond markets, foreign direct investments and portfolio inflows to fund most of the growth going forward," he said.
World Bank, International Finance Corporation and bi-lateral loans would also be tapped he said. Relationships with Japan, India and also China will be strengthened, he said.
Mahendran said there were signs of renewed demand for Sri Lanka’s agricultural exports, despite the currency turmoil in Russia with demand from oil importing countries like Turkey may pick up while Middle Eastern demand may also remain.
But the industry side had to be diversified, he said. Mahendran was a former head of Sri Lanka’s Board of Investment.
"On the industry side we have to diversity," he said. Our tourism sector has much more potential to grow. We should be getting at least 5 to 6 million tourists in the next two to three years with the airport expansion and highways. The services sector will benefit.
"One big priority is to quickly build some export processing zones. Investors come looking for infrastructure. They want to plug and play. That’s what has been missing."
He said falling energy prices will also help. Internationally also falling energy prices will help boost consumer purchasing power, helping both exports and tourism.