MACRO AFFAIRS
Compiled by Shirley Candappa
FISCAL PRUDENCE A PANACEA
Kumar Jayasuriya is hopeful that the fiscal imbalance will be redressed
Q: Since the financial meltdown took root and led to a fully-blown economic crisis, Sri Lanka has faced bankruptcy, runaway inflation and shortages of essential items. So what role could or should Sri Lanka’s corporate sector play in reviving the economy?
A: The economic crisis has manifested itself as a shortage of foreign currency reserves. However, the underlying cause has been years if not decades of overspending relative to our revenue and financing the deficit with borrowings, which have grown to unsustainable levels of debt.
The best way to improve Sri Lanka’s foreign currency reserves is to increase our forex revenue. And the country’s corporates need to focus more on the export of goods and services.
Sri Lanka has always been dependent on the private sector for growth in the past, and the contribution by corporates is even more relevant and necessary under the current circumstances.
Export growth depends on competitiveness, which must be driven by productivity, innovation and diversification of our export basket. These are the opportunities and challenges for Sri Lanka’s corporates.
Business leaders need to communicate openly with their teams, and explain the difficulties that the nation and its organisations are facing. And together, they should identify how their respective organisations can succeed. Corporates that focus on this imperative and act decisively will be winners.
Organisations must band together; and through their trade chambers, they should demand that the government establishes an enabling environment to conduct business. This means providing them with a level playing field that’s not rigged with crony capitalism and corruption.
The government must then ensure that it delivers on this essential prerequisite to achieve any progress. An enabling environment and the ease of doing business incentivise investment, which in turn drives growth.
Q: Would you agree that currently, many SMEs are facing seemingly insurmountable hardships? And in your view, what steps should be taken to support them?
A: There’s no doubt that SMEs need help. However, they also have to help themselves. The mindset of looking for help outside needs to be replaced with one that seeks solutions internally! Helping hands rather than handouts will get us out of a crisis.
In terms of helping hands, the government and banks have provided moratoria on debts – but I don’t know to what extent this can continue. Another factor is that SMEs are undercapitalised and therefore, they borrow heavily – often at high rates of interest.
There should be more venture capital equity investment in SMEs. They won’t be burdened by high interest costs in that way, and funds can be diverted towards improving productivity and value enhancement initiatives.
Q: In the context of improving corporate governance, what further steps do you think the country should take?
A: Sri Lanka’s expenditure has been far greater than its income; and as a result, the chief issue is the fiscal imbalance.
The government has been forced to address this – and the recent tax increases, pricing of utilities and intention to restructure loss making SOEs are all due to this situation.
An increase in interest rates to control inflation is another necessary step but this has adversely impacted SMEs. With inflation being brought under control, interest rates should ease.
Macroeconomic stability is critical and the government appears to be doing the right things to reform the structural weaknesses of the economy. What’s important however, is making sure that our debt is brought down to a sustainable level.
Meanwhile, it’s also necessary to create employment and increase growth. Both reforms and growth should be pursued simultaneously.
We need to enter into trade agreements with other nations and plug into international supply chains that cater to countries which produce only a small component of larger products. This needs priority.
Vietnam is a good example of successful trade agreements fuelling growth.
Q: Given the fiscal and economic challenges facing the country, how can Sri Lanka’s financial services industry help other sectors to flourish – in particular the nation’s entrepreneurs?
A: The first priority is that banks must be stable – the talk has been about domestic debt restructuring and how this will impact the banking sector. If the situation is handled judiciously and professionally however, speculation can be alleviated.
There is an opportunity for two of the nation’s largest state banks to be floated on the Colombo Stock Exchange (CSE) and their recapitalisation process can benefit from share floatation.
This will also ease the politicisation of state banks because their boards of directors will be accountable to shareholders rather than the government. It will promote greater accountability and professionalism in management.
Secondly, banks need to support entrepreneurs and the ideas they generate, and lend on the basis of viability of businesses rather than collateral. There is also space for development banks and venture capital institutions to drive economic activity, job creation and growth.
