Innovative, dynamic policy strategies needed for economic revival: Central Bank Governor

Following is the speech delivered by Central Bank Governor Deshamanya Prof. W. D. Lakshman at the 61st Annual General Meeting of the National Chamber of Commerce held recently.

I am deeply honoured to be invited as the Guest of Honour at the 61st Annual General Meeting of the National Chamber of Commerce.  I thank the organizing committee for inviting me on this special occasion.

It is after a long professional career as an academic economist that have come to occupy the position of Governor, Central Bank.  My focus during my earlier incarnation was on development studies.  I speak now from the position of Central Bank Head, but due to influence of my work as a development economist, my views could be somewhat different from those of a typical central banker. 

I however try to straddle between the two subject areas, development studies and central banking, maintaining a balance that is desirable from the point of view of promoting Sri Lanka’s future development prospects.

Current economic conditions
Let me begin by making a brief assessment of the current economic conditions of Sri Lanka, commenting in the process about required changes in development policy approaches and practices.  I will then make a few comments that fall into the subject area of central banking, shedding some light on required re-thinking in the practice of 
central banking.

Sri Lankan economy today is at a crossroads.  From the late 1970s we have been following a socio-economic policy model involving increasing liberalization of markets and an integration of the country with the on-going processes of globalization.  

As part of this policy model we were also trying to undertake structural and institutional reforms of the type that are generally recommended by international financial institutions.  While this policy model had produced some good results, my view is that, on the whole, it has produced a series of anti-development tendencies in the economy and polity.  

Those who support this policy package however, would argue that Sri Lanka had come to suffer those adverse results because the recommended policy package of liberalization was not implemented correctly in full.  They had consistently argued that Sri Lanka left a large part of the liberalization agenda unmet.  

We have come to the important milestone of ‘upper middle income country’” level in World Bank country classification.  The structural and institutional transformation of the socio-economic system over the last four decades or so was extensive and wide-ranging.

Yet we are saddled withsignificant socio-economicissueslike below potential growth, continued persistence of poverty pockets, unacceptable levels of regional inequalities andunderutilized productive resources.  At the macroeconomic policy level, there are the continuing balance of payments difficulties, the shortfall of non-debt creating capital inflows, large fiscal deficits and high public debt levels. 

In order to resolve the continuing socio-economic problems, thereby putting the country on a sustainable path of rapid and inclusive growth, changes in the policy framework so far pursued are required.  Innovative and dynamic policy strategies need to be introduced and faithfully implemented.  I believe this is the commitment of the present governmental authorities.

Problems mainly of global origin
Being a small country closely integrated to the world economy, policy problems faced by Sri Lanka are due significantly to factors of global origin, in addition obviously to those emanating from domestic developments and policy failures. 

The global trade cycle, movements in the world economic growth rate, behaviour of world inflation, interest rate movements, commodity price movements and exchange ratefluctuations are among the major global factors of significance here.  

Factors of domestic origin are well known and too numerous to mention, arising out of the patterns of behaviour of the people and organizations and policy failures.  In the short-term, the effects of nature’s movements have exercised a significant impact, particularly over the recent past.Short-term impacts of man-made disasters also ought to be mentioned.

The dissatisfaction about existing policy environment has been widespread.  Therefore, the fiscal authorities and various other regulatory and promotional entities of the government, guided and led by the Office of the President, are in the process of searching for alternative policies that can achieve shared and inclusive development on a sustainable basis and at a rapid pace.  

CB’s role
Managing the monetary and financial developments and regulating relevant institutions, is entrusted to the Central Bank.  Through these activities, the Central Bank is assigned the role of facilitating the development promotional work of the other parts of the policy establishment.  It is well-known that the current law entrusts the Central Bank with two major functions –
(a) maintaining of economic and price stability, and
(b) maintaining financial system stability.

On this basis, the Central Bank highlights the price level stability maintained at ‘single digit’ level over the recent past.  The general price level is determined by many factors.  All these factors are not under Central Bank policy control.  

The low levels of inflation which prevailed over the recent past has produced the benefits, economic theory attributes to low level of inflation.  Low inflation has also contributed to maintain stable political conditions in the country.  The Central Bank, given its mandate, will continue to strive to maintain inflation within a range of 4-6 per cent through a transparent, coherent, and accountable monetary policy framework.

Accommodative monetary policy stance
The low inflation environment and muted inflationary pressures also create some space for fiscal as well as monetary stimulus to work, boosting economic activity.  Price stability without growth is clearly undesirable. 

Accordingly, the Central Bank adopts an accommodative monetary policy stance, supported by the global trends toward accommodative monetary policies. 

Supported by timely and appropriate measures of monetary policy and regulation, businesses and individuals today are in a position to gain from low and declining market interest rates. We are beginning to see results of these policies in the real economy by way of expansion in private sector credit and investment. 

Facilitation of govt. growth initiatives
On the other hand, the Central Bank is also actively facilitating several growth initiatives of the government. The government has identified the support needed by small and medium scale enterprises (SMEs) from the banking sector, during phases of economic downturn as well as during the period of their takeoff.

The most recent action on these lines is the special credit support scheme extended to eligible SMEs thus complementing the fiscal incentives already announced by the Government. In line with the government policies and following stakeholder consultation, the Central Bank issued a circular last week giving guidelines to licensed banks on the implementation of this scheme. 

The business sectors which will benefit from this scheme include SMEs in manufacturing, services, agriculture (including processing) and construction, in both performing and non-performing loan categories. 

These measures are expected to accelerate credit growth to the private sector in 2020 and beyond, enabling a speedy revival of economic activity. In the meantime, the Central Bank will continue to work towards development of a financial sector which is dynamic, resilient and efficient. 

Human and social side
Let me now turn to the human and social side of Sri Lankan policy outcomes.  Production growth after all is necessary, though not sufficient to enhance and uplift human and social conditions of living.   

Thanks to various actions of governments since independence, Sri Lanka has achieved creditable social outcomes at even relatively low levels of average incomes.  Even as early as the 1970s, Sri Lanka was seen as an “outlier” in this respect in inter-country comparative studies.  Our achievements in educational, health and gender parityareas have been particularly impressive, although, clearly, problems and issues remain.  

Today, Sri Lanka possesses a large pool of skilled and semi-skilled workforce. In addition, the infrastructure investments of the government in the post-conflict era have tremendously improved inter-regional connectivity within the country.The pervasive telecommunications network is the other significant infrastructural achievement.  These investments have not only improved access to existing markets but have also opened up new market opportunities.  Sri Lanka today is well on its way to take its place in the global digital revolution.

Beyond the Upper Middle Income level
Against this backdrop, Sri Lanka endeavours to progress beyond the Upper Middle Income economy level. The country is reorienting its growth strategy highlighting and supporting the domestic capital and entrepreneurship to help develop a strong national bourgeoisie.  

With the  collaboration of foreign capital and domestic state capital, private capital could take the country into the next level of growth.  Productivity-oriented expansion and growth of agriculture and manufacturing, targeting both import  substitution and export orientation would, we expect, enable Sri Lanka in the next few years to come to achieve its so far illusive economic take-off.  Playing its much hyped engine of growth role, the private sector, I hope, will work collaboratively with the public sector to achieve national goals.

We in the Central Bank, working in the money and finance sectors, will provide the needed guidance and assistance to achieve these national objectives. The growth and development so facilitated, we hope, will expand productivity and production, as well as productive employment.  The aspired growth will thus be regionally balanced, shared among different social segments and inclusive of particularly the weaker segments of the population.  

Global experience
Global experience highlights that the private sector with businesses such as those run by many in this room today, make a key contribution to promoting economic growth – through investments, knowledge transfer and enhanced productivity. 

Businesses are capable of creating new markets, fostering competition and making investments, which in turn, contribute to the productive and efficient allocation of resources, thereby paving way for social and economic advancement. 

In Sri Lanka as of now, the private sector has moved into several areas of social importance in a big way, such as housing, infrastructure, health and education.  Businesses can play a pivotal role in improving service delivery through their own institutions and also as public-private partnerships.

Private sector engagement in infrastructure projects allows for risk sharing.  Private investment projects in infrastructure benefit from improved institutional capacity. This is of particular importance given the tight fiscal constraints faced by the government at present, constraining its capacity to undertake infrastructure construction projects. 

Further, in the wake of climate change, the private sector can also lead the way forward in the adoption and/or adaptation of environment-friendly technologies.  

Support and guidance
Central Bank, operating in its designated policy territory, will provide its support and guidance in this national endeavour.  I call for your participation and collaboration with all stakeholders to enable Sri Lanka make its next big LEAP forward.  I assure you backed up by all information and analytical insights the Central Bank Governor is privy to, the times before us are, on the whole promising and good, in spite of the disaster mongers around.

I wish the officials, members and stakeholders of the National Chamber of Commerce and all of you who are gathered here a successful and prosperous year ahead.