Sri Lanka: Finance minister embarks on ‘repair job’

By:
Eric Ellis
Published on:

Karunanayake targets ‘ostentatious expenditures’; contracts were ‘marked up ninefold’.

Ravi Karunanayake-600
Ravi Karunanayake, Sri Lanka’s new finance minister


"We are going through every deal, every decision, every transaction [the previous government] made, forensically, with great detail and attention," says Ravi Karunanayake, Sri Lanka’s new finance minister, as he picks through the national accounts hastily left by his spendthrift predecessors, the long-ruling Rajapaksa dynasty ousted in January’s surprise election result. 

"This country had gotten out of control and now we are putting it right. And there will be consequences."

Of particular interest, his aides say, are the various vanity infrastructural projects begun in the Rajapaksa era, such as the eponymously named international airport in the rural south of the island, the former president’s electoral heartland, infamous for its lack of flights, abandoned even by the state-owned carrier. 

The airport has been earning, at best, around $60,000 a month in revenues, hardly enough, Karunanayake says, to service annual interest payments alone of around $45 million. 

"What to do?" Karunanayake asks rhetorically. "It’s not really a headache, it’s really a nightmare. Ostentatious expenditures that were in the budget have now been taken out."

Part of his job, he says, is to manage a "clean-up operation," renegotiating the terms agreed by his predecessors. "I’m honouring contracts, but daylight robbery is another matter. The toughest thing is the transformation. We have to walk to talk."

He adds: "It’s not just a repair job but a resuscitation. I come from the private sector as a chartered accountant, and, coming into this office, I never knew that countries could be run in such a mess.

"Even a betel nut shop in the street has an accounting system, but not here. I don’t want to run down my own country but I must put it in context. I was astounded it was run in this way."

Accountability, transparency, good governance are foremost in our minds; not reducing corruption but eliminating corruption
Ravi Karunanayake

According to Moody’s, Karunanayake and his colleagues inherited debt of more $25 billion to offshore creditors, amounting to around 75% of GDP. Interest payments alone eat around 40% of government revenue, and nearly half of Sri Lanka’s sovereign loans are in foreign currency, a lethal combination in an economy that has seen the rupee steadily fall in recent years, down 20% since 2012.

"Accountability, transparency, good governance are foremost in our minds; not reducing corruption but eliminating corruption," he says.

"Its difficult, a big job. It’s not just financial, but it’s also about peddling influence. When the top is clean, its flows down."

Karunanayake is something of a big beast of the United National Party. A chartered accountant by profession and a UNP parliamentarian since the late 1990s, he was commerce minister in the early 2000s, in the pre-Rajapaksa days when the island enjoyed peace and a sustained economic boom.

The cosmetic contrast with the previous administration is stark. The Rajapaksa regime shrouded itself in the robes of political Buddhism. The Catholic Karunanayake and his colleagues, particularly from the strongly pro-business UNP, wear ties and business suits and recruit energetic young interns on ministerial secondment from the private sector.

In his buzzy office next to the old parliament building of colonial-era Ceylon, 52-year-old Karunanayake is the oldest by some years among his staff who, if their office chatter is any measure, are moved by the intrigues of TV dramas the West Wing, Borgen and, perhaps more appropriately for Sri Lanka’s rancid politics, of Frank Underwood and House of Cards.

As his aides work out the 2015 budget, Karunanayake tells Euromoney he’s forecasting GDP growth of 8%. That is around two points higher than most, but Karunanayake says the elimination of corruption will help deliver better numbers "simply by removing the padding, the extra costs that corruption inserts".

Infrastructure

He cites roadbuilding in the once war-torn Tamil north, where the Rajapaksas had launched a huge catch-up infrastructure programme. Karunanayake talks of contracts he has seen where the nominal amounts had been marked up nine times more than the cost of building the actual road. "So now, when there’s a $100 million contract and $10 million is only required, we can put the $90 million into another new investment."

Ironically, in a country hardly immune to financial scandals, Karunayake’s remarks come on the same day the newly installed governor at the Central Bank of Sri Lanka, former HSBC Singapore private banker Arjuna Mahendran, took an unexpected leave of absence just weeks after he had taken office.

Mahendran stands accused of showing favouritism in a state Treasury bond issue to a finance firm, Perpetual Asset Management, controlled by his son-in-law, Colombo financier and socialite Arjun Aloysius. He denies wrongdoing, claiming he was not involved in the decision-making of the CBSL bond issue. State-appointed investigators cleared him and he was back in gubernatorial chair in late April, but the heat continues to simmer around him: opposition parliamentarians claim the investigation was not independent.

Mahendran had taken over the CBSL from Ajith Cabraal, who ran the central bank from 2006, a year after Mahinda Rajapaksa first came to power. 

With 18 months to run on his appointed term, Cabraal resigned as CBSL governor within hours of the electoral rout in January, despite his repeated insistence – to Euromoney among many others – over his years in office that he was genuinely independent. Now he is being investigated by the country’s Commission to Investigate Allegations of Bribery or Corruption.