Ravi Karunanayake, Minister of Finance and Planning: Interview

Interview:  Ravi Karunanayake

What changes will the new administration make?

RAVI KARUNANAYAKE: We are a new government with a fresh mandate that will enable us to become much stronger than we are now. Our intention is to rectify many of the anomalies that have been present in past reporting and demonstrate the progress Sri Lanka can make. Fiscal and monetary policies will be spelled out in order to achieve our national targets.

We believe Sri Lanka is on the threshold of a major period of sustained growth, especially when compared to other countries in the region. This country is a shining star that can grow to be the crown jewel of South Asia. We want the world to know that after a long period of war and an inefficient previous administration, we are now back on the radar.

That being said, one of the biggest constraints we face is that legacy. We inherited an economy burdened by public debt, now at LKR8.9trn ($64.1bn). Debt servicing is far higher than we can afford, accounting for LKR1.3trn ($9.4bn) of our LKR1.5trn ($10.8bn) in revenues; nearly 90% of earnings go this route. Our intention is to create a longer tenor, reduce the interest rate and ensure we have adequate revenue structures that are capable of covering the basics.

How is the balance of payments (BoP) improving?

KARUNANAYAKE: We have seen trade balances improve, resulting in a stronger BoP. Although many of these factors are out of our hands, such as oil prices, we believe this benefit will continue for the next two years, after which point we need to be capable of overcoming any vicissitudes that arise. We primarily want a robust push towards exports, which will further strengthen our BoP in the long-term.

To what extent is GDP growth being driven by public infrastructure spending?

KARUNANAYAKE: There is no doubt that construction and infrastructure have been driving factors. We grew at 6.4% in the first quarter of 2015, but are expecting 7.2% growth for the year. Our belief is that distortions have taken place, but that these are being rectified. There is no more massaging of accounts, and overall we are taking steps in the right direction.

When corruption is addressed anywhere in the world, there is a reduction in growth, and Sri Lanka is no exception. While there will be an automatic reduction, this does not mean the country is not growing. The economy as well as the industrial, financial services and tourism sectors have all done very well despite the lull in infrastructure and construction, as these projects are currently being reviewed.

In the grand scheme of things, going forward it must be mandated that unsolicited proposals be solicited and that tender processes are followed to the letter of the law. The country’s highest office holders are now operating like professionals, and when the top is clean, it expands downwards. We believe in walking the talk, and this is happening.

The key factor is business confidence. You can increase your market share through things like free trade agreements, but confidence is the most important. For instance, in Singapore you sense that things are happening even if this is not the case; whereas here, things happen but people do not feel it. This is the perception we must change about Sri Lanka.

How can Sri Lanka improve revenue collection?

KARUNANAYAKE: The ratio of revenue to GDP is around 10.6%, when it should be closer to 14-15%. It is not a problem of under-collection, but rather a lack of collection. Taxes are very much in place, but in the past this equated to corrupt gains for certain individuals. We have been advocating for lower taxes and higher compliance, and this is where we are headed. The first four months of 2015 alone saw a 23% jump in revenues, driven by proper collection practices, governance and accountability.