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Saturday July 20th, 2024

Sri Lanka government heading into a perfect storm: Opinion

ECONOMYNEXT – Sri Lanka is heading for a perfect storm around the end of the year as political and community opposition to the government rises amid looming food and fuel shortages.
Just in the past few days there have been more significant protest campaigns that should worry the government.

Hundreds of Catholics, including many priests and nuns lined the road leading to the Supreme Court on Nov 8 as a petition filed by Rev Cyril Gamini Fernando, a spokesman for the Catholic church calling on the apex court to prevent his arrest by the Criminal Investigation Department was heard. The protestors who were joined by some members of the Buddhist Clergy as well, did not shout slogans or hold placards. Instead, some silently prayed the Rosary.

Fr Cyril Gamini, as he is popularly known, had earned ire of the head of the State Intelligence Service Major General Suresh Salley by raising the question of how the intelligence agencies could have been unaware of the existence of the National Towheed Jamaat and its leader Mohammed Zaharan. He was participating in a webinar along with Malcolm Cardinal Ranjith on Oct 24 hosted by a group of Sri Lankan expatriates based in Australia. This group is among many that have formed overseas by concerned Sri Lankan Catholics calling for justice for the Easter Sunday attacks.

Maj Gen Salley complained that he had been defamed by this comment and called for an investigationalleging that the priest had endangered national security and incited communal disharmony. He could have been charged under the Sri Lankan Law modelled on the International Convention on Civil and Political Rights (ICCPR). The law has been abused by the Sri Lanka police in prosecuting several people including a Sinhala short story writer in the Kurunegala area and a Tamil language poet from Kattankudy.

Links between the intelligence services and Zaharan have been spoken of before. Prof Rajan Hoole in his book on the Easter Tragedy enumerated the many times Zaharan had been arrested but had been released due to pressure from the Security Forces. Several cabinet ministers have spoken about it and former Army Commander and Samagi Jana Balavegaya MP Sarath Fonseka gave more details in a speech in Parliament.

The Supreme Court ruled in Fr Cyril Gamini’s favor and the Attorney General’s Department pledged that the priest would not be arrested.

The following day saw a mass protest, a raucous parade of several thousand angry people from the Negombo area, a predominantly Catholic region of the island. They were calling for justice for the Easter Sunday attacks as well as protesting a government move to acquire and sell lands around the Negombo lagoon. The lands are within the Muthurajawela wet zone protected under the Ramsar treaty.Many people said they would lose their property if the government goes ahead and acquires their lands. The protest shut down the Negombo urban area and the police did not intervene. The protestors were joined by members of the Catholic clergy from parishes in the area.

The Catholic Church’s demand that the investigations into the Easter attack reveal who was the mastermind behind the blasts that killed some 260 people is gathering strength. The Church has shown it is unstoppable and is willing to fight for answers. Cardinal Ranjith has openly expressed his anger and disappointment against the government for failing to come up with answers to questions his congregationhas raised.

The Cardinal who was seen as leaning towards the Rajapaksas in the past has stood firm with his congregation on this issue. Fr Cyril Gamini is the public face of the protest and has been addressing concerned Catholic groups that are agitating for answers.

In the meantime, many famers’ groups worried about low yields after the government abruptly stopped the import of artificial fertilizer have continued to protest against the government, burning effigies of Agriculture Minister Mahindanda Aluthgamage and staging demonstrations in many areas.

The country’s teachers and Principals are also on the warpath after promised salary revisions were not granted to their protest. In early November teachers and principals in the Mawanella area surrounded a local police station alleging that the police had failed to arrest a governing party local councilor who had assaulted protesting teachers and parents.

And now riding on this wave of anti-government feeling the main opposition SJB wants to organize mass protests led by farmers next week on Nov 16. SJB MP Dr Harsha de Silva was quoted as saying “anyone” can join.

Inside the government the eleven smaller parties in the coalition have been making meek sounds of protest as well. These parties which include the Sri Lanka Freedom Party, Wimal Weerawansha’s National Freedom Front and Udaya Gammanpila’s Pivithuru Hela Urumaya have tried to form a caucus within the Sri Lanka Podujana Peramuna alliance. Although they have had several meetings with Prime Minister Mahinda Rajapaksa to address their concerns, they are yet to leave the government or appear to reconcile.

The SLFP has been complaining of poor treatment by the leaders of the government and the SLPP General Secretary Sagala Kariyawasam told reporters that the smaller parties could leave the government if they wished to. While most of the dissidents are not raising their voice too high veteran Communist Party Member D E W Gunesekara called the current Cabinet the worst he has ever seen and “a bunch of buffaloes.” He also said that President Gotabaya Rajapaksa is a “scarecrow” using a Sinhala term that can also mean he is without life.

Prime Minister Mahinda, however, seems to be more in touch with the feelings of the SLPP’s constituency. At the party convention held last week he upbraided the SLPP members for not being in touch with constituents. “We have to do politics with the farmers, teachers and others,” he said.

Coming up shortly of course are the Budget proposals. Most Sri Lankans are hoping there will be some relief for them from the rising cost of living and lack of jobs. But Finance Minister Basil Rajapaksa has not been promising anything. Most likely the government may go ahead with cutting government pensions and other measures to pull the government out of its financial woes.

With rising protests, embarrassing questions over the Easter Sunday attacksand a perception among the ordinary people that the government is inept, the ingredients are there for a perfect storm.

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Jayampathy Wickramaratne PC, responds to President on constitutional article 83

ECONOMYNEXT – Jayampathy Wickramaratne, President’s Counsel had responded to a statement made by President Ranil Wickremesinghe that Article 83 (b) of the constitution which has reference to a six year term was left alone not due to any ‘lapse’ on his part.

A Cabinet sub-committee headed by Premier Wickremesinghe was appointed to oversee the Nineteenth Amendment process.

The changes to the Constitution, were made by a team of legal officers of which he was member, overseen by a Cabinet sub-committee headed by then Prime Minister Ranil Wickremesinghe.

“Presidential candidate Maithripala Sirisena signed a memorandum of understanding with a group of 49 political parties and organisations headed by the Venerable Maduluwawe Sobitha Nayaka Thero at Viharamaha Devi Park, in which he pledged to abolish the Executive Presidency altogether,” Wickramaratne explained.

“However, the very next day, he signed another MOU with the Jathika Hela Urumaya, in which he pledged not to make any constitutional change requiring a Referendum. Mr Sirisena’s election manifesto also stated that no constitutional reform necessitating a Referendum would be initiated.”

The Attorney General also made sure that there were no changes that required a referendum, he said. As a result Article 83 (b) was left as it was.

The full statement is reproduced below:

On President Wickremesinghe’s statement that not amending Article 83 was a lapse on my part

The President stated in Galle on 19 July 2024 that not reducing the upper limit of the term of the President and Parliament from six to five years while preparing the Nineteenth Amendment to the Constitution was a lapse on my part due to my inexperience.

I wish to set the record straight.

Presidential candidate Maithripala Sirisena signed a memorandum of understanding with a group of 49 political parties and organisations headed by the Venerable Maduluwawe Sobitha Nayaka Thero at Viharamaha Devi Park, in which he pledged to abolish the Executive Presidency altogether.

However, the very next day, he signed another MOU with the Jathika Hela Urumaya, in which he pledged not to make any constitutional change requiring a Referendum. Mr Sirisena’s election manifesto also stated that no constitutional reform necessitating a Referendum would be initiated.

Soon after being sworn in, President Sirisena appointed Mr Ranil Wickremesinghe as Prime Minister. Constitutional affairs was Gazetted as a subject under Prime Minister Wickremesinghe. A Cabinet sub-committee headed by Premier Wickremesinghe was appointed to oversee the Nineteenth Amendment process.

The five-member team that prepared the initial draft comprised three retired officials who had served in very senior positions in the Legal Draftsman’s Department, myself and another lawyer.

The entire drafting process was carried out on the basis that the Bill should not be placed for approval at a referendum, in keeping with President Sirisena’s electoral pledge. While the terms of the President and Parliament were proposed to be reduced from six to five years, the upper limit of six years was not touched as that would require a Referendum.

Article 83 of the Constitution mandates that a Bill that seeks to amend or is inconsistent with particular Articles listed or the said upper limits would be required to be passed by a two-thirds majority in Parliament and approved by the People at a Referendum.

It is essential to note that Article 83 itself is included in the list of provisions requiring a Referendum. The several drafts prepared were all shared and discussed with the Cabinet sub-committee.

The draft finally approved by the Cabinet sub-committee was then sent to the Legal Draftsman, who took over as required by law and made some changes. It was then sent to the Attorney-General, who took the view that certain clauses, especially some that reduced the powers of the President, would require a Referendum. Prime Minister Wickremesinghe had several meetings with the Attorney General to discuss the matter. I participated in one such meeting. Several changes had to be made to the Bill because of the Attorney-General’s position.

Prime Minister Wickremesinghe presented the Bill to Parliament. When it was challenged in the Supreme Court, the Attorney-General argued on behalf of the Government that no provision required a Referendum. The clauses that the Supreme Court held to require a Referendum were either amended or withdrawn in Parliament.

In light of the above, I regret that President Wickremesinghe has thought it fit to place the entire blame on me for not reducing the upper limits of the President’s and Parliament’s terms.

I reiterate that the entire amendment process was based on avoiding a Referendum following President Sirisena’s pledge at the Presidential election.

(Dr) Jayampathy Wickramaratne, Presidents Counsel
20 July 2024.

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Sri Lanka banking system foreign assets turn positive in May: analysis

ECONOMYNEXT – Net foreign assets of Sri Lanka’s banking system turned positive in May 2024, official data showed, amid a steady reduction in the negative reserve position of the central bank helped by the current interest rate structure and domestic credit.

In May the combined net foreign assets position of commercial banks and the central bank was about 311 million US dollars by May, up from a negative 178 million US dollars a month earlier, central bank data show.

It was made up of positive 1.9 billion US dollar foreign assets position in overseas banking units and a negative 811-million-dollar position which gave a positive NFA position of about 1.13 billion US dollars for banks.
The central bank still had a negative position of about 821 million dollars by May, down from about 4.5 billion US dollars in last currency crises triggered by deploying liquidity tools (printing money) to cut rates.

The central bank has been collecting reserves for several months, except in June after a confidence shock from the flexible exchange rate and some injections made to keep rates down.

Analysts have warned that under flexible inflation targeting, where there are anchor conflicts, external imbalances will re-emerge when private credit recovers and money is printed to cut rates.

Printing after giving Reserves for Imports

Sri Lanka’s central bank ran up a negative foreign assets position, by spending dollars borrowed from the International Monetary Fund and from other central banks including in Bangladesh and India as well as domestic banks and spending them to suppress market interest rates and finance imports.

An ‘age-of-inflation’ (or age-of-BOP-deficit) central bank that spends reserve for imports, simultaneously prints money into banks, injecting excess rupee reserves to maintain an artificial policy rate, preventing the outflow of real resources to other countries being reflected in bank balance sheets.

The printing of money after spending reserves, or the sterilizing of an outflow, allow banks to give loans without deposits and trigger forex shortages.

To collect foreign assets, a central bank has to do the opposite, and sell its domestic asset portfolio down against dollars purchased from banks, at an appropriate interest rate, which will moderate domestic credit.

Modern IMF-prone reserve collecting central banks are able to mis-target rates beyond their reserves mostly with the aid of Central bank swaps.

Sri Lanka’s central bank also borrowed reserves from domestic banks through swaps, in a somewhat similar operation to the way Lebanon’s central bank borrowed dollars to show reserves instead of buying outright against domestic assets.

Borrowed Reserves

Central bank swaps were invented by the Federal Reserve to mis-target rates and avoid giving gold reserves as macro-economists printed money to target growth in the 1960s and the printed dollars boomeranged on itself from other Bretton Woods central banks that focused on stability.

RELATED Central bank swaps symptomatic of Sri Lanka’s IMF return tickets and default: Bellwether

By March 2022, before rates were hiked, negative reserve position of Sri Lanka’s central bank was around 4.0 billion US dollars.

The negative position worsened to around 4.5 billion US dollars by the third quarter of 2022, helped by credits from Reserve Bank of India, which allowed Sri Lanka to run arrears on Asian Clearing Union balances.

In addition to the swaps, Sri Lanka also had borrowings from the International Monetary Fund which contributed to the negative foreign assets position.

The IMF borrowings came from serial currency crises triggered in the course of money printing to enforce rate cuts and target growth (potential output) and generate twice to three times the level of inflation found in monetarily stable countries through ‘flexible’ inflation targeting.

The external sector started to balance only after ACU credits were stopped. It has since been turned into a swap and the central bank is paying it down steadily in the current interest rate structure.

Related Sri Lanka repays US$225mn to Reserve Bank of India in first quarter

Sri Lanka was unable to use a People’s Bank of China swap to mis-target rates and boost imports its use was barred after gross reserves fell below three months of imports.

Private and State Banks

Sri Lanka’s private and state banks also had negative foreign assets for many years, due to lending to the government through US dollar Sri Lanka Development Bonds and other credits. The dollar loans to the government were financed in part by foreign credit lines.

As downgrades hit the country, and forex shortages worsened from flexible inflation targeting/potential output targeting, banks could not renew their credit lines.

Some banks avoided rolling over Sri Lanka Development Bonds. After the default and debt restructure, they were repaid in rupees leading to banks covering their open positions. The dollars are banked abroad, leading a net foreign assets position.

An improvement of net foreign assets, reflects an outflow of dollars from the domestic economy to foreign accounts, similar to repaying debt for building foreign reserves.

The foreign assets position of banks excluding the central bank turned positive in February 2023 and reached around a billion US dollars by the year end and has remained broadly stable around those levels in 2024r.

RELATED Sri Lanka bank net foreign assets turn positive: analysis

The stabilization of the NFA position in banks may allow the central bank to collect more foreign reserves than earlier, analysts say, at the current interest rate structure as long as money is not injected overnight or term injections to mis-target interest rates claiming inflation was low.

Any confidence shocks from the ‘flexible’ exchange rate or liquidity spikes, would also reduce the ability of the central bank to collect dollars and lead to mini ‘capital flight’ style episodes from importers and exporters. (Colombo/July20/2024)

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New constitutional amendment a ‘necessary revision’: Sri Lanka President

ECONOMYNEXT – Sri Lanka’s President has said a proposed amendment to the country’s constitution was a ‘necessary revision’, which would not result in a postponement of elections.

“In 2015, we proposed a new constitutional amendment,” President Wickremesinghe was quoted as saying during a ceremony to open a court complex in Beligaha, Galle on Friday.

“Typically, I would have assigned this task to K N Choksy, a lawyer.

“However, since he had passed away, the responsibility fell to lawyer Jayampathi Wickramaratne. He was unable to make the necessary revisions. This oversight is regrettable, and I apologize to the nation for it.”

President’s Counsel Wickramaratne has explained that the leaving out Section 83 (b) of the constitution was a not an “oversight” but it was a result of instructions received from the then administration to avoid making changes that required a referendum.

President Maithripala Sirisena in his election manifesto has pledged not to make changes that required a referendum, and the drafting team was told not to make changes that would require a referendum.

Related Sri Lanka’s 6-year Presidential term: problem in drafting 19th amendment explained

Meanwhile President Wickremesinghe said the move to change the constitution should not lead to a delay in elections.

“Our country has upheld democracy since 1931,” he said. “Protecting democracy is crucial. The upcoming election is on schedule, with the Chief Justice and the Supreme Court confirming that it should be held within the specified timeframe, and we support this directive.

“Some critics argue that democracy is at risk during certain crises. However, our constitution, judiciary, and political system have worked to advance and protect it. The most significant threat to our democracy occurred in 2022, yet we have continued to progress through consensus.”

Sri Lanka became the first country in Asia and Africa to grant universal suffrage in 1931, Wickremesinghe said.

“Unlike in the United States, where some states did not extend voting rights to Black people, Sri Lanka is unique for maintaining democracy continuously since then.

“Despite facing wars and rebellions, Sri Lanka has preserved its democratic system, and democracy has remained intact despite numerous challenges.”

Sri Lanka got universal suffrage under British rule.

In Sri Lanka, power transitions smoothly and without conflict after elections, the president said, “a testament to the strength of our democratic process. Despite various debates and issues, democracy has never been compromised.”

Opposition parties and lawyers have charged that the legal process involving changing the constitution could potentially delay the upcoming Presidential elections.

“Article 83 of the Constitution of the Democratic Socialist Republic of Sri Lanka is hereby amended in paragraph (b) thereof, by the substitution for the words “to over six years,”, of the words “to over five years,” the gazette notice issued on the orders of Wickremesinghe says.

Download bill 523-2024-bill-constitution-EN

There is a discrepancy in the Article 83 with reference to a six year term, while the rest of the constitution, refers to a five year term. (Colombo/July19/2024)

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