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Saturday July 20th, 2024

Sri Lanka must not allow elections to distract from stabilisation: ex-central bank chief

ECONOMYNEXT – If Sri Lanka allows elections to distract from the path of recovery, stabilisation and growth, the country will be hit by a fresh crisis far worse than any before, former central bank governor Indrajit Coomaraswamy said.

Speaking at a forum organised by Cal, a Colombo-based investment banking group, Coomaraswmay said on Tuesday September 05 that Sri Lanka’s election calendar has historically resulted in the reversal of progress made under the 16 International Monetary Fund (IMF) programmes that the island nation had undergone until the latest extended fund facility (EFF).

“Every single time there has been an election, Sri Lanka’s macroeconomic policies have become indisciplined. We’ve had 16 IMF programmes before the current one. On many of them we did make progress in stabilisation as we have done on this one. But as soon as an election approached, the progress that was made was reversed,” said Coomaraswamy.

“We’re supposed to be having elections next year. I hope we don’t have the same thing again. We must not allow the gains that we have made to be reversed through policy slippage,” he said.

Critics of President Ranil Wickremesinghe and his administration have been demanding elections, but political analysts say there is no likelihood of a major election until the presidential polls due November 2024.

Noting that Sri Lanka has never done well on structural reforms due to lack of political will in the face of the “losers’” being louder despite being fewer in number, Coomaraswamy said such reforms should now be pursued vigorously.

“Unless we do differently this time, we will not be able to get into a sustained recovery,” he said.

“This time around, if we allow elections to distract us from the path of stabilisation and recovery and then sustained growth, the crisis that will hit us will be worse than anything that we’ve had in the past. It will be worse than what we had some 18 months ago. We should remember that,” he said.

The former central bank chief called for a mould where economics is not seriously undermined  by the electoral calendar.

“That has to change. If it doesn’t, we will lose what we have gained so far and the consequences will be far worse than we’ve ever experienced in the past,” he said.

Explaining why the next crisis, if it were to come to pass, would be worse, Coomaraswamy said Sri Lanka would be entering it with a far lower level of resilience, both in the economy and among the people. Next time around, he said, the impact is going to be much more painful.

“The multiple crises of the present have had such a devastating impact that we’ll be at a much much lower level of resilience going into the next one. We need to make sure we never allow that to happen,” he said.

The electoral calendar was among a series of risks that Coomaraswamy identified as possible obstacles to Sri Lanka’s recovery. Other risks he highlighted included climate risks such as the ongoing El Nino phenomenon and elevated geopolitical tensions which demand a more transparent and prudent external relations policy.

“The world has become a more tense place. That will have an impact on global supply chains and commodity prices. We need to be proactive and factor all that in and see how best to have contingency plans to cope with the impacts of this,” he said.

On the domestic front, the senior economist said Sri Lanka must achieve a primary surplus in the budget to keep the debt stock in check and must also work towards a transformation in exports, aiming at a more diversified export basket with a more complex set of products as well as a diversification of markets.

“Those two things will take us out of this twin-deficit category that we have been stuck in for many years, if we do it well,” he said.

Coomaraswamy said the programme now under way to restructure state-owned enterprises (SOEs) is also critical and should ideally move faster.

“We need to use whatever political capital is necessary to give tailwind to this process,” he said.

SEO restructuring has become an increasingly controversial subject, particularly in light of the latest IMF programme. Socialist-oriented opposition parties have been intensifying their campaigns against what they call the “sale” of “national assets”, with the more right-of-centre main opposition Samagi Jana Balawegaya (SJB) also seemingly jumping on the bandwagon. Protests and campaigns led by leftist trade unions and other activist groups have taken an increasingly anti-IMF character in their critique of the Wickremesinghe administration’s reform agenda.

Coomaraswamy went on to say that Sri Lanka needs to move faster in factor market reforms, improving the investment climate and investment promotion. He also called for expediting new free trade agreements (FTAs).

“There are negotiations to convert the Indian FTA into an economic partnership agreement under ECTA (Economic and Technology Cooperation Agreement). Negotiations for an FTA with China are also ongoing, as well as with Thailand. These need to be pushed forward,” he said.

“The revitalisation of the Singapore FTA is a good thing. It will give us opportunities in terms of investment as well as using that FTA to penetrate the ASEAN market, particularly in e-commerce.”

Coomaraswamy commented on President Wickremesinghe’s plans to join the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement among the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam.

“I don’t think we’ll be able to do it very quickly. The kind of reforms needed to be able to join RCEP will be quite challenging. But it’s a good aspiration to have and it’s a good signal to give to say that we’re keen on joining,” he said.

On Sri Lanka’s relations with India and proposals for a land bridge and grid connectivity on top of plans to improve sea and air connectivity, Coomaraswamy said Sri Lanka can benefit from increased connectivity with the Indian economy.

“We’ve had proximity [to India] forever but the very poor infrastructure in both countries has made transaction costs for cross border economic activity very high. India also had an inward looking strategy for a long time, but now it has its Neighbourhood First policy and its Made In India policy, all of which will create new opportunities for countries in the region,” he said, noting that transaction costs are in fact coming down with improvements in roads, railways, airports etc in both countries.

“We should make a concerted effort to piggyback onto the Indian story,” he said.

In terms of addressing corruption vulnerabilities, which is a key pillar of the ongoing IMF programme, Coomaraswamy said implementation is key.

“Laws mean nothing unless they’re implemented effectively. So it is to be seen whether the anti-corruption act which is better aligned with UN convention on corruption is implemented,” he said.

“The IMF diagnostic on addressing corruption vulnerabilities has just about been finalised. It should be shared with the government this month. Whether or not the government is serious about addressing vulnerabilities will be demonstrated in how it treats the recommendations of this diagnostics study. It will be a good litmus test for the government’s attitude,” he said.

Sri Lanka saw a 31% surge in poverty over the last four years – from 4 million people in 2019 to 7 million in 2023, according to a study by LIRNEasia – and a number of resorts have come out on increased vulnerability, child malnutrition and other indicators of socioeconomic deterioration. Coomaraswamy, while recognising this, said however that the MF cannot be blamed. The ongoing anti-IMF rhetoric has centred its messaging around the IMF, laying the blame for all of Sri Lanka’s ongoing ills at its door.

“People blame the IMF programme. People who do that fail to take into account that the country was in a very big hole before the IMF came. We had massive shortages of essentials, long queues, etc. Very severe problems. Dollar and LKR illiquidity at the time that was causing all these problems, which have been addressed to a significant extent because of the IMF programme,” said Coomaraswamy.

“So you can’t blame the IMF programme. These problems were there because of the hole we had fallen into and that hole was caused by various things which everybody knows,” he said, declining to elaborate on the causes.

The former central bank governor also called for a strengthened social safety net.

“When you have as big an adjustment as we have to make, when the hole is as big as the one that confronts us, there is a strong case for strengthening the social safety net upfront,” he said, adding that the ongoing Aswesuma programme should ideally have been launched sooner.

“It wouldn’t have done away with the increase in poverty and vulnerability, but it could’ve mitigated it to a significant extent,” he said. (Colombo/Sep08/2023)

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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.
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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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