Interview with the Senior Adviser to the Prime Minister on Economic Affairs
Reports in the media claim that the government’s tax cuts will lead to an unsustainable budget deficit.
Earlier this year, the government in power budgeted to achieve an income of LKR 2.1 trillion (2,100 bn) and then they ended up with 1700 bn. So there was a shortfall of LKR 400 bn. Did these tax rates which the government imposed and throttled the people with, and brought business and the country to its knees with, yield the right results? Obviously not. Although they thought they were going to collect so much of taxes, they just couldn’t do it because there wasn’t a tax base. There wasn’t enough income within the country. That’s why we have addressed that question in a very practical manner.
First of all, you have to allow people to do business for the economy to grow. If the economy grows, then you can collect taxes. If there is no income, there’s no income tax. If there’s no turnover, there’s no tax on turnover. If there are no imports, there are no import duties. So it’s useless having high tax rates if that doesn’t work on the ground. We are a practical government. We have to understand what the people can afford and what they will do when taxes are low. We have reduced the taxes so that there will be much greater growth in business, which will then translate into much greater volumes of taxes. So this bogeyman that they are expecting will not materialise because the economy will grow fast, and there will not be a major decline in tax revenue.
Second is the interest rate. When Mahinda Rajapaksa’s former government left, the total interest on debt that the country had to suffer from was only 3.3 billion dollars. Today it is nearly double at 6 billion. Why did that happen? Because the interest rates had gone up so much they actually doubled. Any person on the street will tell you that they cannot do business because the interest rate has doubled. We have to make sure that there is more investment coming into the country to release pressure in the money markets. Then the amount of interest that people have to pay will come down. That will provide them with additional capital to utilise in their business and grow it further.
Third is that a lot of the businessmen are struggling today. Their names are in the CRIB, they cannot borrow, and some have had their assets seized. They are in serious difficulty, so we have to give them some support to get out of this situation. We have to revive those businesses. That is why we have told banks to only accept interest payments for the time being and give a moratorium as far as capital payments are concerned. There’s a freeze for about 18 months, that we have suggested. During that time, the formation of capital can take place again.
With these strategies you will find that the total business climate will improve tremendously. There will be more and more people doing business and coming into the country. Already we are seeing several new investors coming into the country. Once they come, you will find that Sri Lanka will start going into a growth rate of nearly 6% again. The previous government was able to bring down growth from7% right down to 1% – that is their track record. We are reversing that, and growth will now come back to our target of 6% or higher. With that, we’ll see the tax burden not being a burden at all. It will be paid by people, there will be enough money. Interest rates have come down, so the government’s budgets will be much easier to balance. We will get back into that growth mode once again.
There was a news report that Sri Lanka’s credit rating is due to go down because of this tax question. Reports also claim that the amount of foreign investment and bond yields have gone down.
We will have to allay any fears that investors have. You would have seen that investors have taken their money and gone out over the last five years. We haven’t seen any new investment coming in. That is one of the problems we are having. So we are now offering local and overseas investors a platform to have a vibrant Sri Lanka that is going forward instead of going backwards. I’m sure the message will go across to many investors and they would come back and invest, even though in the short term they may be a little nervous. Once you explain things to investors, they will see the logic behind our move and I’m sure they will continue to support Sri Lanka and stay with us. If you take your mind back to 2014, we had as much as USD 3,400 m of overseas investment in our treasury bills and treasury bonds. Today, we have only about USD 600 m. All the rest of it has gone, but I believe there will be investors who will come back and start investing in Sri Lanka again. We’re going to talk to them and tell them, “Look, if you you come back you will be better off. The country will also be better off. Interest rates will come down and you will make a profits.” So it will be a win-win situation for everyone. Sri Lanka will have a lower interest burden. I think, contrary to what is being said now, we will probably have a greater number of investors coming back in due course than the few who may have gone out.
How will you deal with the question of inflation?
The last time we had been in government, and I was in the Central Bank, we brought inflation to heel. We had been a country where inflation in single digits had not been maintained for more than 23 months, prior to my becoming the Governor of the Central Bank. After I became Governor, we maintained inflation at single digits, and mid-single digits at that, for six years at a stretch. That track record has been extended by the current government to 11 years, which is good. We will maintain that and keep an eye at the rate at which prices are going up and take the necessary monetary steps. I’m sure the Central Bank will be looking after that side, and we will soon see inflation under check alongside increasing growth. There’s no use of saying we had inflation under control if we have no growth. Both have to be there. It’s like saying I have no diabetes, but I have a heart problem. So you have to be able to manage all these factors together. Not one after another or one during one time and the other during another time. All factors have to be managed simultaneously.
The previous government spoke a great deal about the middle income trap, that for the last few years we have stagnated at the same level. How can we escape this trap?
I think the last government are the ones who got us into the trap. In 2014, growth was rising fast and we had come to a per capita income of USD 3,800. Normally, the middle income trap is considered to be around the USD 4,000 per capita income mark. We had come up to USD 3,800 and had plans to move away from the middle income trap, and for growth to take place so that we would achieve something like USD 6,500 per capita income by 2020. But we have been trapped by the previous government and kept there. We need to break from from these shackles. There are a few strategies that have to be done in order to break away.
One is that we have to have continuous investment coming into the country. Two is that we have to have a clear improvement of our knowledge as well as the skill levels in the country. Three is that our infrastructure has to be developed continuously well beyond the USD 4,000 per capita income mark, reaching out to the USD 10,000 and 12,000 mark. All strategies these are being planned and done by our government. So I think we won’t get stagnant. We are well aware of the dangers of being trapped so we will have to take these steps quickly to ensure that there is robustness in the economy. We will move much faster in the next few years to come.
Finally, there is the question of rural poverty, because it’s still a big problem. How are you going to address that?
. Excellent question. Rural poverty cannot be addressed by giving the poor a pair of slippers once a year or giving a midday glass of milk once a day. Those things can help, I’m definitely not denying that, but we have to empower our people and get them into a shape where they can look after themselves. No one likes to go behind a politician to get their slippers or to get their glass of milk or to get some sanitary service. People can do these things themselves provided they have the means. The way that you get rural people out of poverty is to ensure that they have the ability to rise and grow. For that, you have to create opportunities around the country. You have to provide good education because if people are educated well, they will probably do much better. I know of so many children who have come from rural backgrounds who are excellent specialists today. They have started off very modestly but rose because they were educated. There are top engineers and accountants who come from very modest rural beginnings and they are proud of that. There are enough case studies of this nature which we must use as energisers to get others activated. I think education, infrastructure in rural areas, and promotion of the Small and Medium Industries will provide the means for rural areas to prosper. One of the reasons why we built highways was so that every area would become accessible. People would have been wondering why we spent money on major highways and thousands of kilometres of roads. Why we put bank branches in rural areas and gave electricity to people across the country. All that was done in order to uplift people. During our time, poverty levels dropped from about 15% to 6%. But during the last five years that trend has reversed, which we have to now stop. We have to empower people with the strategy that I have just mentioned. I’m confident that the people of this country from all areas will improve their living standards and poverty will be a thing of the past in the next five years.