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Tuesday August 16th, 2022

Opinion: Reform the proposed 20th Amendment to strengthen, not weaken, transparency

Opposition lawmakers protest constitutional amendments in Sri Lanka on Sep 23, 2020

ECONOMYNEXT – Following parliamentary elections, President Gotabhaya Rajapaksa wasted no time in obtaining cabinet approval and thereafter Gazetting the proposed 20th Amendment to the 1978 Constitution of Sri Lanka. Many commentators have noted how the 20th Amendment as proposed will diminish parliamentary powers, erode judicial independence, and weaken independent commissions. But it is also critical for ordinary people—especially those who voted for the current government—to know that the proposed 20th Amendment will usher in an era of unchecked corruption shackling future generations. The President and the Prime Minister urge us that repeal of the 19th Amendment is necessary for economic development. What they don’t tell us is that the proposed reforms reduce transparency and oversight, at the expense of economic development. We can and must demand more from our elected leaders.

Passed in 2015, the 19th Amendment to the Constitution requires the Constitutional Council to appoint a qualified auditor as independent Auditor-General. The 20th Amendment empowers the President to appoint any person to this position in his sole discretion. Constitutional protection for the Audit Service Commission will disappear, and audits will no longer be required for the President and Prime Minister. Whereas the 19th Amendment strengthened the Commission to Investigate Allegations of Bribery or Corruption by allowing it to initiate its own inquiries, the proposed 20th Amendment removes constitutional protection altogether, meaning the commission could be abolished by a simple majority vote in Parliament. Even if the Bribery commission remains, the 20th Amendment as proposed will strip its power to commence investigations on its own motion. Finally, the proposed 20th Amendment outright abolishes the National Procurement Commission.

Who benefits from these changes?

The role of the auditor-general is to conduct independent audits of government operations. These audits allow Parliament to scrutinize government spending and “ensure better financial management and optimum use of public resources to maintain sustainable development.” If the National Audit Commission is abolished, so too is its surcharge power, meaning individuals who misappropriate public funds can no longer be held personally liable. How do ordinary Lankans gain by reducing transparency and accountability regarding the governmental use of public funds?

Likewise, the proposed 20A will abolish the National Procurement Services Commission, which serves to “formulate fair, equitable, transparent, competitive and cost-effective procedures and guidelines” for government procurements, and ensure integrity, transparency, and accountability. How is less transparency in big-budget government procurements a good thing for ordinary people?

Short answer? It’s not.

Enhanced anti-corruption measures in the 19th Amendment benefit all of us. While he served as President, Mahinda Rajapaksa commissioned the port project in Hambantota, financed with $1.1 billion in loans from China. The project was built with Chinese contractors, not local labor, and made losses from the moment it opened in 2010. When Mahinda ran for a third term in 2015, his campaign allegedly took kickbacks from the Chinese port fund as had been reported in the media then. With Sri Lanka unable to afford even interest payments on the billion-dollar loan, the Sirisena government had to default and ceded control of the port and 15,000 surrounding acres to China for 99 years. Now Chinese port authorities are trying to pressure local farmers to sell their land to make way for a Chinese industrial zone in Hambantota. Local residents are right to fight and not sell away what belongs to their children. But without independent audits and a robust bribery commission, the Hambantota debacle is bound to repeat.

Hambantota’s port was not an isolated case. President Gotabhaya was charged in 2016 with corruption for illegally transferring $75 million in state-owned weapons to a private security firm named Avant Garde to establish a floating armory. He was separately charged with misappropriating Rs. 33.9 million to build a memorial museum for his parents. While presidential immunity prevents these cases from moving forward, independent audit and procurement functions are essential to preventing misuses of public funds.

Today, the government is embarking on huge development projects, bringing more government institutions under the control of Rajapaksa family members and military officials. With no independent audit and no procurements commission, nepotism, cronyism, and corruption will go unchecked. By abolishing the audit commission and exempting the President and Prime Minister’s offices from audit, the 20th Amendment will permit daylight robbery of public funds. Because these high-ranking officials hold immunity from suit, no person will be able to challenge corruption in court.

So who stands to gain? Clearly, the Rajapaksas do. But what’s in it for the rest of us? If tomorrow the President wants to sign away all our natural resources or seize private property for a big-budget development project, financed by an onerous loan, who can stop him? What oversight or recourse will we have when public officials abuse our trust? The Rajapaksa brothers tell us that the 20th Amendment, complete with the above-mentioned reforms, is crucial to promoting economic development. But the World Bank (not to mention common sense) says the opposite—“corruption impedes investment, with consequent effects on growth and jobs. Countries capable of confronting corruption use their human and financial resources more efficiently, attract more investment, and grow more rapidly.”

It is our duty as citizens to think critically about whether the proposed reforms help or hurt us. This isn’t even about the Rajapaksas, although they certainly stand to gain from reduced oversight. At the heart of any government lies public trust. We place our hard-earned money and rights in the government’s hands and ask only that it acts in our collective interest. Essential to this trust is our ability as citizens to get progress reports from independent auditors and commissions to see that the government remains on the right track. An independent Auditor-General, Procurement Commission, and constitutionally protected commissions addressing audits and bribery are all vital to make sure our government works for us, and not at our expense. Sri Lankans must demand that the 20th Amendment strengthen, not weaken, audit, procurement, and anti-bribery functions, protecting their independence from political interference of any kind. (Colombo, September 27, 2020)

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Sri Lanka sovereign rating at SD but ISBs downgraded to ‘D’ by S&P

ECONOMYNEXT – Sri Lanka’s sovereign rating remains at Selective Default (SD), but the country’s sovereign bonds were downgraded to ‘D’ after missed interest payments, Standard and Poor’s, a rating agency said.

“The Sri Lanka government remains in default on some foreign currency obligations, including international sovereign bonds (ISBs),” the S&P said.

“We do not expect the government to make the payments within 30 calendar days after their due dates.

“We lowered the ratings on the affected bonds to ‘D’, following missed interest payments due on June 3, June 28, and July 18, and a missed principal payment due July 25.”

Sri Lanka is still paying senior creditors with money coming from deferred payments from the Asian Clearing Union.

Sri Lanka started to borrow heavily in foreign bond markets from 2015 after battering its currency peg with extraordinary liquidity injections under ‘flexible inflation targeting and the country lost the ability to roll-over maturing rupee bonds at gross financing level.

From 2015 to 2019, the country had monetary stability only in 2017 and 2019 as the pegged exchange rate regime was shattered with liquidity injections to target an ‘output gap’.

However the targeting the output gap led to currency crises (balance of payment deficit) and growth fell as stabilization measures were slammed.

From 2020 to 2022 even more aggressive liquidity injections were made and taxes were also cut saying there was a ‘persistent output gap’ until all foreign reserves including borrowed reserves were lost and the the country defaulted in peacetime.

The International Monetary Fund gave technical assistance to Sri Lanka to calculate the output gap and also endorsed ‘flexible inflation targeting’, with overnight repo injections, term repo injections, outright purchase of bond, despite having a reserve collecting peg.

On April 12, 2022 Sri Lanka defaulted despite being at peace.

The full statement is reproduced below:

Sri Lanka Bonds Downgraded To ‘D’ After Missed Payments; Sovereign Ratings Affirmed

Overview

The Sri Lanka government remains in default on some foreign currency obligations, including international sovereign bonds (ISBs).

We do not expect the government to make the payments within 30 calendar days after their due dates.

We lowered the ratings on the affected bonds to ‘D’, following missed interest payments due on June 3, June 28, and July 18, and a missed principal payment due July 25.

We affirmed our ‘SD/SD’ foreign currency and ‘CCC-/C’ local currency ratings on Sri Lanka. The outlook on the long-term local currency rating is negative.

Rating Action

On Aug. 15, 2022, S&P Global Ratings affirmed its ‘SD’ long-term and ‘SD’ short-term foreign currency sovereign ratings on Sri Lanka. At the same time, we affirmed our ‘CCC-‘ long-term and ‘C’ short-term local currency sovereign ratings. The outlook on the long-term local currency rating remains negative.

In addition, we lowered to ‘D’ from ‘CC’ the issue ratings on the following bonds with missed coupon or principal payments:

US$650 million, 6.125% bonds due June 3, 2025.

US$1.0 billion, 6.825% bonds due July 18, 2026.

US$1.0 billion, 5.875% bonds due July 25, 2022.

US$500 million, 6.35% bonds due June 28, 2024.

Our transfer and convertibility assessment at ‘CC’ is unchanged.

Outlook

Our foreign currency rating on Sri Lanka is ‘SD’ (selective default). We do not assign outlooks to ‘SD’ ratings because they express a condition and not a forward-looking opinion of default probability.

The negative outlook on the local currency rating reflects the high risk to commercial debt repayments over the next 12 months in the context of Sri Lanka’s economic, external, and fiscal pressures.

Downside scenario

We could lower the local currency ratings if there are indications of nonpayment or restructuring of Sri Lankan rupee-denominated obligations.

Upside scenario

We could revise the outlook to stable or raise the local currency ratings if we perceive that the likelihood of the government’s local currency debt being excluded from any debt restructuring has increased. This could be the case if, for example, the government receives significant donor funding, which gives it some time to implement immediate and transformative reforms.

We would raise our long-term foreign currency sovereign credit rating upon completion of the government’s bond restructuring. The rating would reflect Sri Lanka’s post-restructuring creditworthiness. Our post-restructuring ratings tend to be in the ‘CCC’ or low ‘B’ categories, depending on the sovereign’s new debt structure and capacity to support that debt.

Rationale

Sri Lanka’s external public debt moratorium prevents payment of interest and principal obligations due on the government’s ISBs. As such, interest payments due June 3, June 28, and July 18 on its ISBs maturing 2024, 2025, and 2026, and the principal payment on its July 25, 2022, ISB, would have been affected. Following the missed payments, and given our expectation that payment will not be made within 30 calendar days of the due date, we have lowered the issue ratings on these bonds to ‘D’ (default).

Overdue payments now include the following bonds:

US$1.0 billion, 5.875% bonds due 2022.

US$1.25 billion, 5.75% bonds due 2023.

US$500 million, 6.35% bonds due 2024.

US$1.5 billion, 6.85% bonds due 2025.

US$650 million, 6.125% bonds due 2025.

US$1.0 billion, 6.825% bonds due 2026.

US$1.5 billion, 6.20% bonds due 2027.

US$1.25 billion, 6.75% bonds due 2028.

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Sri Lanka rupee guidance peg edges up; market sees dull trade in govt securities 

ECONOMYNEXT – Sri Lanka’s rupee guidance peg on interbank spot trading strengthened by seven cents while yields on Treasury bills and bonds remained dull on Monday (15) with only a handful of maturities quoted ahead of the central bank’s monetary policy rates later this week, dealers said.

“There was nothing in the market. It was dull today,” a market dealer said.

The central bank will announce its latest key monetary policy rates on Thursday, August 18.

A bond maturing on 01. 06. 2025 closed at at 27.50/28.50 percent on Monday, slightly down from 27.30/28.30 percent on Friday.

The three-month T-bill closed flat at 26.00/27.00 percent on Monday.

Sri Lanka’s central bank announced a guidance peg for interbank transactions strengthened by 7 cents to 360.92 rupees against the US dollar on Monday from 360.85 rupees.

Data showed that commercial banks offered dollars for telegraphic transfers between 369.70 and 370.00 for small transactions. (Colombo/ Aug 15/2022)

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Sri Lanka stocks rally continues for 12th straight session on political stability hopes 

The main index fell for the 4th consecutive session

ECONOMYNEXT – Sri Lanka stocks gained for the 12th consecutive session on Monday (15) ending at their highest in more than four months pushed by retail shares amid signs of political stability after months of protests, dealers said.

The market generated 5.8 billion rupees in turnover, nearly twice of this year’s average daily turnover of 3.11 billion rupees.

The main All Share Price Index (ASPI) rose 1.82% or 164.04 points to 9,191.52, its highest since March 30. The index has risen 19.6% in the last 12 sessions.

“We are seeing a lot of volatility in the market today due to profit taking in the key shares that gained in the last 11 sessions,” a market analyst said.

“Profit-taking also returned after the CSE (Colombo Stock Exchange) published the last set of June reports that showed some counters having done very while some not so much, therefore, there is a significant reaction for that.”

In the last few sessions, the market was mostly driven by Lanka IOC and the plantation sector.

However, ahead of the fuel price revision, LIOC moved to red.

“There was a bit of profit taking on anticipation of price cuts. However, unless fuel prices are cut sharply, LIOC will continue to move,” the analyst said.

At the start of the month, CPC cut fuel prices by 10 rupees based on the price formula.

Globally, crude oil prices have dropped hence there is strong speculation that fuel prices will be cut further.

Last week, Sri Lanka announced a 75 percent electricity tariff hike.

Investors previously feared the move would drag the market down due to possible higher costs for manufacturing firms.

However, the political stability after four months of protest is seen as the catalyst for the market gain, dealers said.

The government also tabled an interim budget last week, revising the budget presented last year as the country is going through an unprecedented economic crisis amid plans on a four-year IMF loan programme, debt restructuring, fiscal reforms, and dealing with loss-making state-owned enterprises.

Sri Lanka already declared sovereign debt default on April 12 this year and failed to pay its first sovereign debt in May amid a deepening economic crisis which later turned into a political crisis and led to a change in the president, cabinet, and government.

The more liquid S&P SL20 index moved up, closing at 0.82% or 25.28 points stronger at 3,097.30.

Sri Lanka is facing its worst fuel and economic crisis in its post-independence era and the economy is expected to contract 7 percent this year.

The main ASPI gained 18.8 percent in August so far after gaining 5.3 percent in July. It lost 9.3 percent in June, 23 percent in April, and 14.5 percent in March.

The market index has lost 24.8 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year when large volumes of money were printed.

Sri Lanka’s sovereign debt default on April 12 has already led the country to be rated with restricted/selective default rating by rating agencies, which has weighed on investor sentiment.

Net foreign outflow was 117 million rupees on Monday while the total net foreign outflow so far this year is 1.3 billion rupees.

Investors are also concerned over the steep fall of the rupee from 203 to 370 levels so far in 2022.

Ceylinco Insurance which pushed the ASPI, closed 11.9 percent up at 2,143.2 rupees a share. Browns Investment closed 8.5 percent up at 8.9 rupees a share, and John Keells Holdings gained 2.5 percent to 129.7 rupees. (Colombo/Aug15/2022)

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