Academy of Financial Studies (AFS) "Chance of Sri Lanka to Be the Next Asian Miracle"

(as delivered)

I. Introduction

Your Excellencies, distinguished guests, ladies and gentlemen.

I am honored to be here at the Academy of Financial Studies (AFS). This is my first visit to Sri Lanka – a country with a rich cultural heritage and abundant natural resources, a country in the middle of an exciting, historic transformation.

In my view, Sri Lanka is on the path to becoming another Asian economic success story. Today, I will discuss Sri Lanka’s opportunities and challenges, and development of the Asian economy as a whole.

II. The "Asian Century"

According to a recent ADB-commissioned publication "Asia 2050—Realizing the Asian Century", the Asia and Pacific region could represent more than 50% of world GDP by the middle of the century. This is indeed realistic considering its share of the world’s total population, which is also just above 50%. This economic scenario will place the region in a dominant global position, exactly like the one it held about 200 years ago.  

This scenario assumes that Asian economies will maintain a strong momentum of growth for the next 40 years. And this implies that Asia must adapt quickly and constantly to shifting global economic and technological conditions. This also implies that Asian countries will strive to sustain needed economic reforms and continue to pursue sound macroeconomic policies as well as strong governance. I believe Asia can make it. I also believe that Sri Lanka can be an integral part of this Asian transformation

III. What has Sri Lanka achieved so far?

Let me turn my focus now to Sri Lanka itself – in particular its achievements so far, and the direction it should aim in the future.

Clearly, Sri Lanka has the basis for a strong economy. Its achievements go back a long way. For instance, ancient Sri Lanka had one of the most advanced irrigation systems in the world. Indeed, the construction of its first large water reservoirs dates back to the 3rd century BC. Thereafter, Sri Lankan engineers developed highly efficient canal systems that delivered water to farms, unleashing highly productive agriculture. It is quite extraordinary that close to 30,000 water reservoirs built way back in the 12th century during the period of King Parakrama Bahu I are still in operation today.

I would like to stress the importance of more recent achievements. Despite three decades of civil conflict, Sri Lanka has managed to become one of the most successful countries in Asia in terms of social development indicators – especially health and education. Let me quote just a few numbers for you:

  • The transition rate from primary to secondary education is now 98%, one of the highest in Asia;
  • Adult literacy stands at 92%, compared with an average of 71% in lower middle income countries in the world;
  • Infant mortality has dropped steadily from 70 per 1,000 live births in 1960, to 8 per 1,000 today;
  • Access to safe water supplies stands at as high as 99% of the urban population.

Performance is equally impressive when it comes to key macroeconomic indicators. Since the end of civil war in May 2009, Sri Lanka has been recording solid rates of growth. During 2010 and 2011, economic growth exceeded 8%.  While growth slowed to 6.3% in 2012 reflecting negative growth in the eurozone, it recovered quickly to 7.3% last year, and is on course to surpassing this rate in 2014.

What is especially striking is that economic activity in post-conflict Northern and Eastern Provinces expanded almost twice as fast as in the rest of the country. This is a remarkable sign of reconstruction and rehabilitation – a means to securing jobs and income, and to delivering reconciliation in the conflict-affected regions.

Macroeconomic management has been sound. High economic growth has been achieved while inflation has remained in single digits. The fiscal deficit declined from 9.9% of GDP in 2009 to 5.9% in 2013.  The external balance has also stabilized since 2011—with the current account deficit narrowing. Gross international reserves have been rising to comfortable levels.  

Another important thing to highlight is that the country has been able to sustain public capital investment levels of about 6% of GDP. Such high level public investment is crucial to ensure robust and sustainable economic growth over the years. These investments are being directed at transport and maritime logistics, water and sanitation, and energy security. Furthermore, the Government has maintained focus on education, health and social protection.

Despite these successes, one major macroeconomic challenge is a low revenue ratio. This stood at 13% in 2013. For the Government to continue to play a key role in infrastructure development and human capital improvement, Sri Lanka will need to increase this ratio. In this regard, I am happy to see that a major tax reform program has been under way since 2011. The aims of the reform include broadening the VAT base and improving administration.    

With per capita income at $3,280 in 2013, I believe the Government’s target of reaching $4,000 by 2016 is realistic. This means that Sri Lanka will make the transition from a lower middle income country to an upper middle income country.  The next target will be to reach high income status. This would make Sri Lanka the first country in South Asia to break through the middle income trap.

I certainly believe that Sri Lanka has the potential to do so. As I mentioned earlier, the country is rich in natural resources. It also has a rich cultural heritage, an important success factor for tourism development. Sri Lanka is also blessed by its unique strategic location, linking East Asia with Europe and Africa, and South Asia with East Asia.

Above all, it has a high quality labor force backed by good education and health systems. These factors combined pave the way for success in high-end garment manufacturing, agribusiness, the tourist industry, port and transshipment logistics, and export-oriented IT and professional services.

IV. Challenges and Government Role

There are, however, challenges ahead.  And the Government must play an important role in addressing them.  Let me highlight just a few.

First, it is imperative to maintain sound macroeconomic policy. The country has done extremely well in this area and all the signals are pointing in the right direction. However, as I’ve already mentioned, there is still work to be done to raise revenue. There is also a need to reform state-owned enterprises (SOEs). Indeed, fiscal consolidation and efficient use of public resources will depend on this reform. Several strategic enterprises may remain publicly owned, but they must be streamlined and reformed to ensure much greater operational, managerial and financial efficiencies. 

The Water Board, for instance, has substantial water leakages and does not invoice all its clients. When these problems are resolved, as being supported by ADB, the Water Board will be able to cover all its costs, and generate enough revenue to invest in the future.    

Second, Sri Lanka will need to keep investing in physical infrastructure. I am a firm believer that the public sector should play a pivotal role in infrastructure development. In addition to promoting public private partnerships (PPPs) to mobilize private sector resources, there is a clear need for the Government itself to implement well-designed public works backed by its own resources and supported by international partners such as ADB.

Third, the country needs a highly skilled labor force to fully tap its potentials. Investment in skills development, including technical and vocational training, is already underway, but I encourage unrelenting investment in upgrading human capital. This will create good jobs and income, and attract new investments from home and abroad.

Fourth, the Government should improve the investment climate and facilitate private sector development. Foreign direct investment should be encouraged to bring along new and improved technologies, as well as new markets and management skills. The Government should set in place sound regulation and legal frameworks, trade facilitation, property rights protection, and financial sector development. It goes without saying that good governance and the rule of law are a fundamental requirement.

Sri Lanka would also benefit from building on its already successful PPPs, such as the Colombo Port terminal. PPPs can complement public investment and be a means to bringing about efficiency in public service delivery.

Fifth, economic growth needs to be inclusive. Infrastructure development should prioritize regionsand sectors that are currently lagging behind. This is important to reduce inequalities and create access to opportunity. Investment in human capital is also fundamental to inclusive development. A progressive tax system and spending on social protection programs should also help mitigate income gaps in the society.   

Finally, one of the most important tasks for the Government is to have a clear vision or strategy for development and to share it with the people. While we know from the economic history of the world that the private sector is an engine for growth in any country, it is the responsibility of the Government, especially in developing countries, to set policies in line with the national strategy, prioritize its spending and investments, and appropriately guide the private sector. The strategy should be based on professional assessments of the country’s comparative advantage and evolving global economic landscape. It should also be pragmatic, realistic and flexible, depending on changing circumstances.

To fulfill all these mandates of the Government, highly motivated and qualified civil servants are crucial. In Sri Lanka, the AFS can play a defining role in promoting innovative thinking among civil servants, sharing knowledge of best practices from around the world, and encouraging their application to policy making and implementation. The AFS is a vital institution for the country’s future.

V. How ADB supports Sri Lanka

I want to turn now to how ADB can support the Government in tackling these development challenges. As a key partner in Sri Lanka's development, ADB has extended over $6.5 billion in project and program loans and grants, and $124 million in technical assistance since 1968.

Until recently, ADB's operations revolved around large, successful and transformational infrastructure projects. For instance, we financed the Expressway connecting Colombo to Galle. We funded the breakwater component of the Colombo Port, and are also investing in water and sanitation projects in the former conflict affected areas.

To match Sri Lanka's development needs as a middle income country, we have been adjusting our operations. Our latest Country Partnership Strategy (CPS) covering the 2012-2016 period places much greater emphasis on human resource development, while still maintaining our presence in infrastructure and private sector development.

To give you a few highlights:

  • We are investing in renewable energy and transmission efficiency, complementing past investments that led to Sri Lanka having up to 96% electrification rates.
  • We will be financing “last mile road connectivity” across 1,000 villages, linking these villages to critical roads, expressways and multi-modal transport systems.
  • We are financing the expansion of water supply systems in key urban areas, including Colombo, with the aim of ensuring 24/7 water supply, higher quality standards, adequate coverage and lower water leakages.
  • We will expand our funding for Science, English, and IT skills in secondary schools, as well as for better technical and vocational education and training.
  • And we will soon embark upon a major water project, involving canals, reservoirs and management systems, to efficiently deliver water from the South to the North of the country for agricultural production and urban uses.

Conclusion: Towards the next Asian Miracle

Ladies and gentlemen, in closing, let me share with you, again, my strong belief that Sri Lanka can and should become another Asian economic success story, and in this sense the next Asian Miracle.
 
ADB is proud to stand by Sri Lanka and be a trusted partner in this process.

I wish you a prosperous Sri Lanka.
Obata Saubaag-yamath Sri Lankawak pathami. (in Sinhala)

I wish you a plentiful Sri Lanka.
Selippana ilangaikkana enn vaallthukkal. (in Tamil)

Thank you very much.