Sri Lanka warned on excessive ministerial powers in new forex law
ECONOMYNEXT – A governance activist has warned Prime Minister Ranil Wickremesinghe that a revised foreign exchange law, tended to give too many powers to the minister of finance extending beyond issuing policy, which undermines good governance or Yahapalanaya, an activist has warned.
Chandra Jayaratne, a governance activist in a letter to the Prime Minister said civil society representations made in regard to the new foreign exchange law had been disregarded in the final law that has been passed by the parliament.
He said reforms were needed to Sri Lanka’s Constitution dealing with ministry secretaries and powers of the minister.
"All stakeholders of society, having experienced the ill effects of endowing power on the Ministers to issue not only policy directions to Ministry Secretaries, but in addition to have power to direct and control them in the exercise of supervision of the Departments and Institutions under the Ministry, would certainly endorse the above reform of limiting the administrative and control power of Ministers," Jayaratne said.
"In the above context, it is most surprising that the Foreign Exchange Act No; 12 of 2017
certified on 28th July 2017 is to be brought in to effect from November 2017, in a form which is mostly unchanged from its original draft.
"This enactment is despite the serious concerns expressed by the civil society before the enactment. It is sad that the assurances the civil society had from those in governance that the issues of priority concern of civil society will be addressed by Committee Stage amendments in Parliament have not been delivered by the Government."
Sri Lanka has suffered and citizens have been victimised due to ministerial or political interference in activities of the government since independence from British rule.
During the latter part of British rule and till 1971, permanent secretaries protected citizens from ad hoc arbitrary actions of rulers, elected or otherwise, freedom advocates say. After secretaries were appointed at the pleasure of the President rather than a civil service commission, citizens were exposed to arbitrary action. A constitutional council which was brought re-built a just government does not appoint ministry secretaries.
Meanwhile Jayaratne said in 1946, when Sri Lanka had permanent secretaries, the minister only had general powers.
"The Ceylon Constitution Order in Council 1946, endowed on Ministers only general powers of direction and control, with the relevant provision reading as “Each Permanent Secretary shall, subject to the general direction and control of his Minister, exercise supervision over the department or departments of Government in the charge of his Minister," he pointed out.
Jayaratne said it was necessary to allow the central bank to carry out its functions independently. Outside of the short periods of the recent past, when politically driven persons and cronies of those in the apex of power and governance headed the Central Bank, the top tier leaders of the Central Bank have upheld and implemented best practices and principles of Central Banking.
Sri Lanka lost free capital mobility it had under British rule with the setting up of a money printing central bank in 1951.
It printed money (either to finance deficit or artificially keep down interest rates or both) and tried to control the exchange rate at the same time, which was not practically possible, without controlling forex flows.
The contradictory exchange and monetary policy (explained by the impossible trinity of monetary policy objectives) inevitably generated forex shortages and started authorities started punishing people who tried to protect their savings from effective expropriation a type of state sponsored robbery, with draconian exchange controls and criminal penalties.
The exchange controls themselves were one of most serious losses of freedoms, experienced by citizens of Sri Lanka after independence from British rule after the creation of a so-called soft-pegged exchange rate.
Once a person has complied with tax and other laws, where he moves the money to, should not be a concern for the state and the ruling class.
"The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges," explained economist t Friedrich von Hayek in 1944 a few years before Sri Lanka entered the failed Bretton Woods soft-peg system.
"Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference.
"Yet the experience of most continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty.
"It is in fact the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape not merely for the rich, but for everybody.”
The full text of the letter by Chandra Jayaratne is reproduced below:
3rd November 2017
An Open letter to the Prime Minister and Copied to the President
Dear Mr. Prime Minister,
“Yahapalanaya” is not Taking Away Accountabilities of Independent Public Institutions and Vesting them in Cabinet Ministers
In order to assure Good Governance-“Yahapalanaya”, as the Chairman of the Parliamentary Steering Committee on Constitutional Affairs, You are vested with the leadership accountability to ensure that the recommendations linked to the reform of article 52(2) of the Constitution dealing with Secretaries to Ministries, as duly endorsed by the Sub Committee on Public Finance, is steered through the Constitutional Reforms process and embodied in the new Constitution. This single move will make a significant difference to assuring Yahapalanaya-Good Governance.
The Ceylon Constitution Order in Council 1946, endowed on Ministers only general powers of direction and control, with the relevant provision reading as “Each Permanent Secretary shall, subject to the general direction and control of his Minister, exercise supervision over the department or departments of Government in the charge of his Minister.
All stakeholders of society, having experienced the ill effects of endowing power on the Ministers to issue not only policy directions to Ministry Secretaries, but in addition to have power to direct and control them in the exercise of supervision of the Departments and Institutions under the Ministry, would certainly endorse the above reform of limiting the administrative and control power of Ministers.
In the above context, it is most surprising that the Foreign Exchange Act No; 12 of 2017 certified on 28th July 2017 is to be brought in to effect from November 2017, in a form which is mostly unchanged from its original draft. This enactment is despite the serious concerns expressed by the civil society before the enactment. It is sad that the assurances the civil society had from those in governance that the issues of priority concern of civil society will be addressed by Committee Stage amendments in Parliament have not been delivered by the Government.
Outside of the short periods of the recent past, when politically driven persons and cronies of those in the apex of power and governance headed the Central Bank, the top tier leaders of the Central Bank have upheld and implemented best practices and principles of Central Banking.
The best of talent available in the country is attracted to the Central Bank and key staff members are amongst the most competent professionals in the market. Resources for references and networking and exposure through best available training options enrich the capability of staff of the Central Bank. As a Public Institution engaged in regulatory governance, the Central Bank has unquestioned integrity and capability, so long as political interference and influence do not taint such core values.
The Monetary Board, when properly constituted with persons of integrity and professionalism, provides an apex structure of leadership and effective decision making for best practices driven good governance.
In the above context it is difficult to neither to understand nor accept, the rationale for taking away the powers and accountability hitherto vested in the Central Bank and its affiliated agencies, in exercising best judgment and professionalism based regulatory enforcements concerning the management of foreign exchange. It is even more difficult to justify how these accountability transfers can be made to a Minister and not to an Independent Public Institution, especially in the light of the unanimous agreement of the Parliamentary Sub Committee that Article 52(2) should revert to the pre 1972 Constitutional provisions.
Even at this late stage, the Civil Society urges you, in the context of your commitment to Yahapalanaya-Good Governance, to reconsider the likely negative implications and the potential future impact on good governance and monetary management, arising from the following issues, risks, unprofessional practices and financial crimes, by enforcing the new law as presently enacted
: • Bringing in to force the new law effective November 2017, in the absence of essential regulations and guidelines, especially when such regulations and guidelines have not been transparently reviewed with civil society;
• The key decision making functions with the highest levels of authority and empowerment in the management and governance have been shifted from
o the expertise and experience enriched,
o citizen recognized independent public institution of the Central Bank, to a politically elected individual minister, leaving the Monetary Board and the Central Bank accountable for monetary stability assurance under the Monetary Law, being vested with only the agency functions of implementation, which latter function also as per Ministerial directions, and thus violates the accepted best practice principles of management and control by an Independent Public Regulatory Institution
o Sections 2 (1 & 2), Minister is empowered to issue directions to the Central Bank and the Central Bank has to follow as the agent of the Government
o Section 4 (2) c, Central Bank can grant special permission to any person within Sri Lanka ( ie. other than an authorized or restricted dealer) to deal in foreign exchange, as prescribed by the Minister by Gazette
o Sections 7 (1) and (2) and (10), Minister (having regard to treaty /agreement provisions and impact on monetary policy and stability) in consultation with the Monetary Board and with the approval of the Cabinet, authorize by regulations, the permitted class or classes of capital transactions in foreign exchange. In exceptional circumstances in accordance with directions issued by the Minister, the Monetary Board is to permit capital transactions not permitted by regulations
o Sections 8 (1) and (2), A person in or resident in Sri Lanka can export from Sri Lanka or import in to Sri Lanka or hold foreign exchange in possession or acquire foreign assets from foreign exchange derived by the conversion of Rupees or an asset in Sri Lanka, subject only to such limits as prescribed by the Minister by Gazette
o Sections 9 (1 to 4), Central Bank may subject to approval of the Minister issue guidelines and directions to authorized/restricted dealers or to any person, class or classes of persons engaging in current and capital or other transactions relating to foreign exchange
o Sections 11(1), Central Bank needs to inform the Minister before issuing directions to dealers to comply with provisions of the Act, even where such parties have violated the Act or regulations
o Section 12 empowers the Minister to extend the allowed time period for concluding an investigation
o Section 13, The Minister to appoint a Board of Inquiry to inquire in to appeals
o Sections 22, (1 and 3) Where the Monetary Board advises the Minister that remittances of foreign currency in and out of Sri Lanka constitute a potential threat to the financial stability of Sri Lanka, the Minister may with the approval of the Cabinet, take steps to restrict or regulate such remittances for a period not exceeding 6 months and shall forthwith communicate same to Parliament. Such limitation period may be extended by the Minister with approval of Parliament to a period in the aggregate not exceeding one year. Is this process practical in a severe crisis situation and does it not impede on the independence of the Central Bank as per Monetary Law?
• In terms of clause 8 (3), any Sri Lankan Citizen, resident in Sri Lanka, who remits to Sri Lanka any foreign exchange previously not declared and which are not the property in respect of which proceedings are pending in a court of law or covered by an order of a Court of Law under Prevention of Money Laundering or Convention on the Suppression of Terrorism Financing,
o Will not be deemed to be the property obtained by the commission of an offense under Prevention of Money Laundering Law
o is liable to pay only a remittance fee of one percent, where such remittance exceeds USD one million and
o Provided however if such remittances are invested in Sri Lanka Development Bonds the remittance fee is exempted and
o There shall be no restrictions on the repatriation such funds
The longer term risks and implications on Sri Lanka of these provisions appear not adequately addressed despite the amber warning submissions of the civil society.
• The provisions of section 12 requiring every investigation or inquiry for failure to comply with the provisions of the Act or regulations to be concluded within six months is totally impractical
• The penal sanctions being only a monetary fine of a limited extent may take away the only deterrent to prevent the commission of such offenses
• With the repealing of the Exchange Control Act and requiring that all suits, actions and proceedings instituted under the repealed Act to be concluded within 6 months, is totally impractical and will be contrary to the present government’s commitments to effectively enforce the law and the campaign promises made during the 2015 elections.
• The wide ranging relaxations and concessions made, with the bringing in to effect of this Act, and the options now available for Ministerial directions based capital transactions to take place, will weaken significantly the regulatory and enforcement processes currently in place, and this can lead to significant value illegal transactions, financial crimes, and money laundering, especially due to the lacunae in
o The Criminal Procedure Code
o Money Laundering Act
o Lack of effectively embedding in local legal framework provisions set out in relevant Conventions and International Agreements
• The Colombo Port Financial City based International Financial Centre currently under development will need to be endowed with concessions and benefits going much further and broader in scope than this enactment and unless essential safeguards are embedded there, Sri Lanka could receive negative classifications in financial ratings and global acceptance.
With international and local research studies, economic and social indicators and other clear signals visible, indicating a significant informal/black economy, a high degree of undervaluing and over valuing for customs, marketing of overseas investment options, trusts and financial instruments, high incidence of narcotic shipments/transshipments, perceived high incidence of gold, other precious metals , gems and currency smuggling and perceived high degree of money laundering, civil society yet again raise strong amber signals of potential risks post enactment. This open letter is to serve on you formal notice of above signals and civil society that best judgment based leadership decision making will follow.