Sri Lanka requires a consistent economic policy – Nalaka Godahewa
“Sri Lanka’s economy is currently in very bad shape,” says Nalaka Godahewa. “However, with the presidential election on 16 November, we expect a big change in the economic prospects for Sri Lanka under the new government.”
Academically qualified in the three very different disciplines of Engineering, Marketing and Accountancy, Godahewa acquired a reputation as a change expert. As chairman of Sri Lanka Tourism, he formulated the new tourism development strategy. Appointed as Chair of the Securities Exchange Commission of Sri Lanka, he oversaw the turnaround in the stock market following a prolonged slump in the early 2010s. He spoke to OSL Magazine about the likely policy changes if the opposition wins the presidential election on 16 November.
“The economic policies will be more people-centric,” he says, “which will focus on all sectors. Services, agriculture, industries, we want to develop all of those, and be on par with global expectations. Most importantly, we believe there will be stability in the economy, which is lacking today. Today, politically, economically, socially, there is unrest everywhere. The chaotic situation is affecting the confidence of both local and foreign investors. I believe the new government will bring that stability back, which will give the confidence required for investors to come and invest.”
Godahewa stresses the need for stability and a consistent policy, a vital need for foreign investors –who must know that, after investing in a country, that they will receive continuous returns, and that unpredictability will be limited. Investors know the difference between different economies, and the opportunities available. They understand that a lot of business can be done within, as well as from Sri Lanka, because of its geographical advantage, as long as there is a politically stable environment. They will invest if an investment-friendly environment is created.
“It is very simple. First of all, you must have a policy! One policy, which doesn’t change all the time. If you look at the current government, which came to power in 2015, one would be surprised to know that they have presented nine different economic policies during the first four years. The tenth didn’t come this year, probably because people started laughing at that. That kind of lack of consistency, lack of direction, is what caused the current economic crisis in this country.”He assures that the new government will have one policy, which have already been declared, and are open to the public now, which will be consistent and not change.
Building up the local supply chain, he acknowledges, must be taken into account very seriously. “Local industries have to be developed. Sometimes when you say you are following open economic policies, you are allowing everything to come in, that does not help the local economy. I think globally, now there is a trend, that the leaders realise that they have to protect the local economy. That is the same from China, to Russia to the USA. Even President Trump has realised this. So why don’t we do the same thing? We need to protect our local entrepreneurs, local businesspeople and allow them to get involved in production that will service the supply chain, not only producing locally, but also going and competing in the global market, which they will do if we help them to stand up and develop their industries. Give them the right technologies, the right training, and government assistance and they can make a difference.”
There are two sides to technology. The software side is something that can grow very quickly, because Sri Lanka’s next generation are capable of learning fast to be on par with other countries, as long as they are supported with high-speed internet, and other infrastructure. The experience of other Asian countries, such as Bangladesh, which have tech-savvy younger generations. The ICT industry, currently a USD 1 billion industry, has great potential to grow.
“They say that if you give them a sufficient number of people, they can in a very short period take it to a USD 3-5 billion industry.”
The other side of technology, high-tech manufacturing, is an area into which foreign investors should be encouraged to enter. Godahewa thinks that this kind of industry should receive incentives, on a selective basis. The government should pick and choose, not give incentives to just any foreign investor. Whatever incentives and facilities are required should be granted to foreign investors in this field, to set up and transfer technology, and to import machinery and equipment that are necessary but cannot be produced in Sri Lanka.
Local research and development (R&D) cannot be ignored either. “Those people who are innovative and creative must be given financial assistance, such as low-cost loans,” he says. “We have realised that the future for Sri Lanka becoming a developed nation is in the technological sphere. That is the trend that we should not miss. The new government will be very focussed on developing the technological segment.”
One of the key priorities of an incoming Science and Technology minister would be to develop technological capability in Sri Lanka. This would require investment in research and development, separate funds for supporting which will be established. Human capital would be developed by investing in education, and changes to be brought in are expected to create a far more creative generation of youth.
The current economic crisis, Godehewa holds, has much to do with the level of confidence. Businesspeople have lost faith in the system, and will not invest. “They are holding their monies back. Look at the stock market, the way it is performing. It is a pathetic situation. In 2015, the last time I was regulating the capital market in the country, we were considered the best in Asia, and today it is the worst in Asia. That shows the level of confidence that people have.”
He advocates bringing back the confidence of local investors – to incentivise foreign investors. The starting point would be simplifying the complex tax system, and that requires abolishing the Inland Revenue Act, No. 24 of 2017, copied from an African country and not suited to Sri Lanka, the tax system of which has more than a century of learning behind it.
Currently, most businesspeople struggle with their banking facilities, being on the CRIB (defaulters on the list of the Credit Information Bureau of Sri Lanka). They need some practical action to get some relief, some time and space to bounce back. This includes those on the CRIB who have good past track records. The new government will negotiate a moratorium for them with the banks.
“We are very particular about reducing tax,” he insists, “at both the corporate and individual level. We must let people save their money and let people have more money to spend. That is how we can create more money circulation in the economy.”
Tax cuts, he points out, need not result in decreased revenues. They would make businesses more active, and individuals spend more, starting the country’s economic growth; invariably, growing taxable income, so tax revenue would increase. Of course steps must be taken to ensure collection. There is a multiplicity of taxes on incomes, consumption and imports. Loopholes in the system, which can be manipulated, combined with corruption, mean that collection is far from comprehensive. These can be eliminated by introducing the right technology, as other countries have done, and minimising the involvement of people in the decision chain; tax collection will immediately improve.
“For example, take customs,” he says. “Customs can very easily decide their rates based on a system. If you know the weight of an item, the volume of an item, why can’t you decide the tax rate, why do you need an individual to go and decide on that? Sometimes, you might miss out here and there, but overall, it will be much simpler, and less prone to abuse, which will immediately increase your revenue from the current dismal level, itself.”
The Inland Revenue has been trying to implement an income tax system for many years, which can be done, eliminating dependence on individuals and boosting collection relatively easily.
Godahewa explains that, in order to develop the country, you must start looking for its strengths, which are a good location, a good climate and an intelligent base of human resources. All these strengths must be utilised to plan the future. In particular, the location, geographically in the centre of Asia, connecting East with West, makes logistics a logical potential sector for economic development. This made connectivity, and hence Hambantota Port and Mattala Airport, important. He thinks their description as “white elephant” was a politically motivated creation
“They were not white elephants. People who can’t understand this, and can’t see the big picture, look at these investments and say they are white elephants. How can they be white elephants? They were just produced, there was no time to give returns, and Hambantota port, within three years of operation, started making profits.”
He thinks that Mattala Airport is similar: a second airport was necessary to bring international airlines, looking for a second airport, to the country. Furthermore, Mattala was not built as an isolated airport, nor the port as an isolated port, but as part of the industrial city coming up in Hambantota, to support an industrial zone. That was the big picture which, he says, the new government failed to see.
Godahewa is adamant on the issue. “This current government tried to project a picture that it is a huge debt burden to the people. This is an absolute lie, because Hambantota was never built by the Treasury’s money.”
He points out that the port was actually constructed by the Sri Lanka Ports Authority (SLPA), a profit-making government institution, which borrowed about USD 1,250 million, from China to do so. Adding to this the interest component, the total pay-back amounted to USD 1,750 million over a period of 22 years. Within five years, the Ports Authority paid back USD 500 million, and still managed to make a profit.
“So if you can pay back USD 500 million out of USD 1,250 million, even before the port became fully operational, you can easily imagine, had they continued, they wouldn’t have needed 20 years to pay back that loan, they would have paid it back within 10 years. Without saying that, the current government gave away the Hambantota Port. That is the stupidity. The inability to see the future.”
He does not reserve his judgement on the current administration, the incompetence of which, he says, led to the “pathetic situation” in which, with the entire region is growing at more than 5%, Sri Lanka become “Asia’s sick man”.
“I think we went through a very bad period over the last five years, everything went wrong, people expected things to be better than what it was, at a time things were going right. What happened was everything started falling on its face, and today, the economy, which was growing at 7% plus, during the latter part of the 2012-2014 period, is down to 1.6%, as the Central Bank chief himself admitted.” However, he finishes on a positive note about the future.
“So we need to now take a decision, remove this incompetent lot, say goodbye to them and bring back a set of leaders who have vision for the country. Bring back a set of technocrats who can develop this country, and get on with our job once again. I think if we work together, we can bounce back.”