Ravi Karunanayake has been Sri Lanka’s finance minister since a coalition government came to power under President Maithripala Sirisena at the end of 2014.
On the international stage, he successfully helped negotiate a $1.5 billion facility with the International Monetary Fund to defuse a balance of payments crisis created by the previous government’s debt-funded infrastructure policies.
Domestically he is regarded as a man with a very robust attitude.
Most recently, he has been caught up in spat with the Chinese ambassador, Yi Xianliang, who criticised him for asking for new loans after constantly complaining the existing ones were too expensive.
Here he discusses how the government is trying to manage the fallout from the balance of payments crisis as it steers the country onto a new growth path.
You announced a lot of measures during the recent November 10th budget. What top three do you think people should focus on?
Well actually the budget was basically prepared around three areas: fiscal consolidation; fiscal discipline and; making sure the full benefit is felt by the lower and middle strata of society.
A second aspect was to direct investment towards capital expenditure areas such as education, health, infrastructure and projects, which yield an economic return.
The third aspect surrounded boosting export development.
You’ve had to grapple with a major balance of payments crisis. How far are you now in terms of coming out of it?
We inherited a very sick economy. We’ve managed to increase revenue to GDP by one percentage point.
We’ll almost get to 15% this year. By 2020, we’re looking at 18%.
People have applauded the government’s revenue generating measures, but some say implementation is not what it could be?
I agree with their skepticism in certain areas, but it should be directed to the past not the future.
Can you pinpoint some areas where the government has delivered?
Yes, I’d say we’ve managed to target subsidies to the real recipient particularly when it comes to natural disasters. We’ve got almost Rs15 billion to those areas.
You frequently talk about changing the taxation structure of the country. Can you explain?
We want direct taxation to amount to 60% and indirect taxation the remaining 40%. At the moment indirect taxation is 80%.
That’s the approach we’re adopting and you’ll see more policies along those lines. Over the short-term it may look as if it’s going the other way but the overall direction is towards direct taxation.
Where the corporate sector’s concerned we have staggered the tax level. We are trying to reduce taxes for the knowledge-driven economy, while export taxes are 14%, general taxes 28% and sin taxes 40%.
When it comes to direct taxation it’s all about capturing the tax base. How can you do that if you have an inadequate electronic system?
Well that’s what we inherited, but we’re expediting the project. It’s scheduled to be delivered between 2017 and 2020. We’re moving towards that.
We’re integrating different systems so everything links up.
The government has also announced or recommenced a lot of infrastructure projects.
Yes we’ve got expressways, housing development, the Megalopolis around Colombo and the port and industrial zone around Hambantota in the deep South. We want to achieve balanced development across the country.
But if you’ve got limited finances isn’t it better have to concentrate your firepower on one or two projects?
Firstly, we have to think about what we inherited because the government can’t spend on everything.
So what we’ve done is set up public private partnerships (PPP) so we can execute all these projects simultaneously. At the end of the day, the government will only take on the final interest payment rather than the full capital payment.
The PPP legislation isn’t in place yet though.
It is functioning. We don’t need to have the legislation per se. You can have the methodology and put that into practice.
Will you set up a one-stop shop as Indonesia has done?
Yes we’re doing that. The company will be approved in the next few days and will become operational on January 1st 2017.
Another big piece of forthcoming legislation concerns exchange controls. What are your thoughts on how this will be overhauled?
Well basically, exchange controls should become a thing of the past. We’re removing all the draconian laws and adopting real-life situations.
Most importantly it shouldn’t be a criminal act to have $10. Instead, we’ll be looking at the heinousness of the crime.
Given the current amount of the foreign exchange reserves, won’t it be dangerous to liberalise the capital account?
We’re not liberalising the capital account. We are opening the markets up. The foreign exchange management act will basically consider dangerous outflows.
Looking at the specifics of some of your projects, you’ve been applauded for the debt for lease that’s proposed for Hambantota as it will ease the country’s debt load. But what does that mean? Will the Chinese just lease the port, or will they also have land around it to build the industrial zone?
It’s not just Chinese. The investors can be Chinese, Indian, or American as long as the pay the price.
But what does the debt for lease actually encompass? Is it just the port, or does it include the land around it to develop into an industrial zone?
We’re looking at equity participation for the port. It’s a public private partnership. So I don’t understand your question since the government will also own shares.
But the government has a minority stake of 20% doesn’t it?
But if you have incurred $1.5 billion debt and big interest payments, how do you pay that loan off?
Yes I understand that and also the lease structure. What I’m asking is how the government will structure the land around the port to develop the industrial zone, or is that yet to be decided? Will the government own the industrial park?
Yes.
And you’ll encourage companies from all over the world?
Yes.
And is the set up for the Port City Project in Colombo similar? The Chinese have a lease, but the government is responsible for the planning and the zoning and what actually goes in it?
Yes.
And what’s your current thinking about what should go into the Port City? I’ve heard different views. Some people say it should be more residential with a beach and parks, while others have said it should become a financial centre.
I don’t think you’ve spoken to anyone who knows what’s going on.
That’s right and but they’re all keen to find out.
They’ll find out in due time. What it will be is a commercially viable, vibrant financial city.
On a broader note, Sri Lanka had very high growth rates straight after the civil war finished in 2009. Those rates have stabilized and come down now. Do you think they can go back to that higher level again?
We previously had a government, which manipulated the figures. They got to 7.4% but it was rebased to 3.9%.
So it’s not out of line to have 5% now. We believe in having the correct growth rates, which aren’t manipulated.
And what do you think the correct growth rate for Sri Lanka should be for the next stage of its development?
Within the next two to three years it will be between 6% and 8%.
What specific sectors will drive that?
Education, information technology, agriculture and textiles will be drivers.
Some IT workers are very fearful of the Indian Free Trade Agreement you’re negotiating because they think India has an unemployment problem.
You know the European Union is very fearful in the way it looks at Donald Trump's election. Each one has their own things. Each country has their owns problems.
I believe it (the Indian Free Trade Agreement) will be net positive in terms of economic growth, the multiplier effect and opening up a market of 1 billion to us when we have only 20 million.
Will the Port City and other industrial zones have different regulations and laws? There’s talk they will be based on UK law and the British Supreme Court will be the ultimate legal entity. Is that something you’re thinking about?
No.
So that’s a mistake then as the Companies Act is based on New Zealand law?
It will be based on Sri Lanka law except the financial city where we’ll bring in internationally accepted law.
FinanceAsia is holding a Sri Lankan conference in March. What message would you like to give investors who are planning to come?
I’d love to see them. We aim for consistency and simplification in our laws.
We’re doing away with bureaucratic processes. Delivery will be the proof of the pudding and we want them to invest based on that confidence.
