A. The Americans and the Europeans were able to act on time. Some of the leading commercial banks in America which were given bailout packages, have been able to return some of that money. Of course the European recovery has not been so rapid. But within the USA, there has been a positive recovery during the past one year. This does not mean that everything is fine. In some places, property prices are not the same as it was, but in some other places, it has recovered. Unemployment is still a major problem. The largest economy in the world is still the USA, the second is Japan, and now the third largest is China. The US economy is still roughly three times bigger than the Chinese economy. The American market is still a very important factor for most developing countries. It is true that China has advanced by leaps and bounds over the past twenty years or so, and it is the same with India, but they have to depend on the American market. Therefore, the recovery of the USA, will help the world economy to also recover. So the world economic recession has been reversed in a very short time when compared to the 1930s when recovery took a much longer time. One reason for the quick recovery, could be globalization. When the 1929 crash took place, heralding the beginning of the great depression, the world was fragmented, and there were more trade barriers at that time. There was competitive currency devaluation. Then with Hitler and other dictators, there was further isolation. Now fortunately, such a situation is not to be seen in the world. The recession began in 2008. Now, in the middle of 2009, the signs of recovery can be seen. By the end of the year, I think things will be much better. But there will be problems. Unemployment is high and there is a segment of American society that lost their houses. So social problems will remain for some time. One good lesson to learn from all this is that while there was an election going on, the American government did not hide the real situation of the economy from the public. While the Republican party had fielded a candidate for the presidential election, the incumbent president George W.Bush and the other leaders of the government were telling the truth to the public. These are the things we must learn from those countries. We must not hide facts particularly those relating to the economy.

A. Your general conclusion may be correct. But at the same time, we must not forget that in the agricultural sector, except for the paddy sector, (and the tea sector which is now recovering) the other sectors have been adversely affected. Coconut and cinnamon sectors faced problems. The apparel sector, which is our major industrial export, is facing a huge problem. The other day, I saw the deputy minister of finance saying that this laying off of workers has not really happened. But the central bank report has admitted it. Some garment factories have closed down or retrenched workers. My first visit to the USA was in 1986. I went shopping and bought some clothes for my children and when I came to my room I realized that almost all those garments were made in Sri Lanka. Last month I was in the USA, and in most of the leading department stores, most of the garments are now from India, Vitetnam, Bangaladesh, and so on. Some specialized places such as Victoria’s Secret, still has Sri Lankan garments. But the garment sector is facing a crisis. Our garments are becoming expensive and are not competitive. We are facing problems in foreign employment as well. I went through the poverty figures of the latest central bank report. Even as late as 2007, 41% of the population was living on less than two Dollars a day. Another problem is the taxes. The indirect taxes in this country are much higher than even some developed countries. Yesterday I saw in the newspapers that the government had a target of earning 20% of GDP as tax revenue. Taking direct taxes from wealthy people is OK, but here, we mostly depend on indirect taxes. Most indirect taxes are imposed on goods and services used by low income groups. For example, telephones are now essential items. About 25 to 30% of all telephone bills are government taxes. So the economy is not all that healthy. Of course when there is a war going on, you have to meet defense expenditure. In a situation of war, you can’t postpone expenditure. Building of houses and constructing dams can be postponed for some time, but when the country is at war, needs have to be met immediately.

A. Small scale paddy farmers are given subsidized fertilizer. But everybody else has to pay not only the market price, but the taxes as well. In the coconut sector the price of fertilizer is still high despite the fact that world market prices of fertilizer has come down. Fertilizer is an input, and taxes on inputs should be increased only if production has to be curtailed. The reduction in the world market price has to be passed down to the user. But the government is not doing this on the grounds that they have to recover losses. The paddy sector is given fertilizer at Rs 350 so they are trying to recover that subsidy from coconut growers and tea growers. Because of this, people are now not fertilizing coconut or tea plantations. One big mistake that the government made is that when they were in a position to give relief to the people, they did not do that. When crude oil went up to 125 a barrel, we were selling petrol for 120 per liter. When crude oil came down to 40, we were still selling at the same price. In the USA, when crude oil prices were at its peak, they were selling petrol at 4.50$. When crude oil came down to 40$, petrol came down to 1.50$. When crude oil went up to 70$, the price of petrol went up to 2.50$. When the Sri Lankan government sells petrol at Rs 130, almost 50% is government taxes. They are selling gas at 1500 and about 20% of that (Rs 300) is government taxes. So people have not been given the benefit of world market prices.

A. In talking about the indebtedness of the country, we always talk about the ratio of debt to the GDP and we are happy that it has come down. But this does not mean anything. It depends on one’s ability to pay back the loans. In Japan, the debt to GDP ratio was more than 100% even last year. Even if the ratio goes up to 125% or more it does not matter if the loans are to be paid in 30 or 40 years. But even if the ratio is 70% and we have to pay it all back in about five years with a huge interest, then it’s an entirely different story. In the case of Egypt and Israel, most money comes in as soft loans or grants. One of the problems that the government is now facing is that the annual payment of loan interest alone is 800 to 900 million US$ and at the end of this year, it may become one billion. Our total export earnings is around eight billion US$. If we have to pay one billion as loan installments, it will be a huge burden to the economy.

A. There is no clear economic vision. Basically, the government does not believe in market-driven policies and hence the interventions in economic management in several fields. It seems that the government admires the Chavez/ Venezuelan kind of economic model, a classic example of which is that a hardcore JVPer (now JNPer) has been given the market-driven tourist industry as his portfolio. The government must, at least, study the German and French leaders’ recent announcement about the government’s role in managing the economy, rather than following the Venezuelan model. One area where the government made a mistake is antagonising the west too much. When I was serving as ambassador in Japan, a senior Indian diplomat said to me that our problem is that we always think about self respect, not self interest. He cited Thailand as a good example of a country that thought of self interest first, and they have been able to survive whatever problem came their way. In the recent past, we should have been more patient instead of antagonizing the western world. The central bank governor first said that we can manage even without GSP+. Recently he said that even if the IMF loan does not come, we have other options. It is true that commercial credit is available but the public has to pay the higher interest.

A. I do admit that while there was a war, huge defense expenditure had to be incurred and the government was able to manage it. But people had to suffer and now the government should relax the tension a bit. The nation building tax which came as 1%, has now gone up to 3%. Earlier, about a 1000 vehicles used to come through the customs every month. Now it is down to ten or fifteen. So there have been huge losses in revenue. The government may be trying to recover these losses by other means. Apart from taxes, another aspect that has to be looked into is the purchasing power of the people. When the produce from the north started coming in to the Dambulla market, produce from other areas had to be thrown away, because there was no demand. If 41% of the population is living on less than two Dollars a day, their purchasing power is limited to that. When production is increased, purchasing power also has to be enhanced. The most important factor in the development of a country is capital formation, at an affordable interest. If you look at the lending and deposit rates in the bank, there is a huge difference. Banks earn huge profits. Profits have to be there, but it can’t be the only purpose. According to the 2008 central bank report, the lending rate is 18.5% while the deposit rate is 11.6% - a gap of almost 7%. In places like India and Japan, the lending rates are about 5-7% and not beyond 10%. Inputs, such as electricity, have to be supplied at competitive rates. It was said that prices would come down with the commissioning of the Kerawalapitiya power plant. But now I heard that the unit cost is more than 30 Rs. I hope this will not happen in the case of Norochcholai as well. Simply producing electricity is not enough. It has to be competitive and affordable. When small private sector hydro and thermal generation projects came in, the agreed prices of those companies was more than the actual cost. So there’s bribery involved.

A. Going in for coal power and as some seem to be contemplating, even nuclear energy is a must. One of the reasons why some industrialists have relocated to India, Bangladesh and Vietnam is the cost of electricity. If the only option left is nuclear, then we have to go for it.

A. From our own budget, may be not. But a foreign investor could do it, as a viable business venture. There is also more potential for coal power plants. In the first world bank report put out in the early 1950s, they have referred to electricity generation and an interesting suggestion they had made was that the hydro electricity grid should go only up to Anuradhapura. Beyond that, they had suggested the setting up of a different grid with a different generation system like coal because the transmission of hydro-electricity from Norton Bridge to Jaffna was very expensive. Some say that in time to come even coal will be expensive. Then the only option left would be nuclear.