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Saturday July 20th, 2024

Sri Lanka’s economic crisis protests see national unity

Pix by T.N.Nawas

ECONOMYNEXT – Sri Lanka’s main protest site against President Gotabaya Rajapaksa by his secretariat building has become a rare sight of national unity with all communities coming forward in a show of national unity in diversity.

With the introduction of the popular vote by the British, politicians, the urban intelligensia and sections of Sri Lanka’s clergy have fired linguistic, ethnic and religious hatred to win votes or pass legislation to elevate one group over another after independence.

Separately legislation was made to make naturalization almost impossible in another fit of nationalism, while making a large group of people who were born in the country stateless, critics say.

Before colonial rulers brought the popular vote and parliament, Sri Lanka was ruled by a feudal class who intermarried with their kin in India and who were largely indifferent to linguistic hate, much like the monarchies of the rest of Asia and the world.

The “Gota Go Home” campaign, demanding President Gotabaya Rajapaksa to resign is a rare phenomenon in the island nation of 22 million people.

Many protestors however do not necessarily have a deep understanding of political theory that place human lives above nationalism, inherent liberties people are born with or the armed violent coercive European style state that takes them away, but are driven by economic considerations, brought to a head by extraordinary levels of money printed by the central bank to keep rates down which created forex shortages.

The money was printed by economists backing the Sri Lanka Podujana Party who wanted to create a ‘production economy’ within ‘developmental state’.

“In the emerging developmental state, the central bank stands ready and is willing to join hands with fiscal and policy planning authorities to help open the vistas of prosperity for the benefit of the people,” Central Bank Governor W D Lakshman said delivering the 70th anniversary lecture of the agency.

“In this context, the Central Bank of Sri Lanka, with its 70 years history is being expected to play its role as an agent of development.”

Related

Sri Lanka central bank to work closely with finance ministry in developmental state: Governor

Instead providing economic and price stability under its governing law, the agency had earlier printed money under a ‘flexible inflation targeting’ creating two currency crises under ‘flexible inflation targeting’ fueling stagflation and helping bring President Rajapaksa to power. (Sri Lanka’s UNP pays the price for currency depreciation, REER targeting)

Flexible Exchange Rate Crisis

The forex shortages from the ‘flexible exchange rate’ which is neither a floating rate nor a fixed exchange rate has in turn triggered shortages of cooking gas, electricity, medicine and some foods like milk.

After two years of money printing, inflation hit 18.7 percent in March and food index is up 30.1 percent over the past year and 42.2 percent over two years.

“Budder-ter-kanna…(to fill the stomach),” chants a leader of one group of protestors. “Buth tikker nehe.. (there is no rice) answers his followers in chorus.

“Uyar gun-ner (to cook it),” the leader says. “Gasuth ne” (there is no gas) answers the group.

“Gedera in-ner (to stay at home),” starts the leader. “Light-uth ne” (there is no power) the protestors answer.

“Aye munter raver-ten-na,” (we will not be deceived by them again) chants a group in the Sinhalese language.

“Rata kun-ner-ter denneth ne (will not allow them to eat/consume the country)

The protest is within a stone’s throw of the country’s central bank which is responsible creating forex shortages by printing excess money to keep interest rates down.

In the two years to February 2022, the central bank had printed 2.13 trillion rupees, firing domestic credit and blowing the balance of payments apart.

The massive liquidity injections made under so-called Modern Monetary Theory during the tenure which makes it impossible to hold an exchange rate steady without losing reserves had been dubbed the ‘Lakshman shock’ by W A Wijewardene, a rare classical economist in the island full of Mercantilists.

The central bank operates an unstable soft-peg with the US dollar called a ‘flexible exchange rate’ which is neither a hard peg (consistent external anchor) nor a free floating rate (consistent domestic anchor), using shifting rules in a monetary regime called flexible inflation targeting, which had created three currency crises since 2015.

Newly appointed Central Bank Governor Nandalal Weerasinghe has hiked rates by a record 700 percent in a bid to protect the rupee by slowing economic activities and to reduce the inflation the agency would create in the coming months.

The central bank had had created high inflation and forex shortages for 72 years by printing money mis-using its ‘monetary policy independence’ granted by the parliament in 1950 through a law drawn up in the style of Argentina’s central bank to operate an unstable soft-pegged exchange rate regime.

From 1885 to 1950 the country had a hard peg (currency board) with no anchor conflicts which had steered the island through World Wars and a Great Depression.

The soft-pegged central bank brought increasingly draconian exchange controls from 1952 and an import control law was enacted in 1969 by an administration which printed money and created official parallel exchange rates, shortly before its ouster.

In the 1970s the two laws were extensively used in what is now called the ‘closed economy’ when shortages, rationing and black markets were widespread and profits were made by so-called import substitution oligarchs as now.

In the 1980s the economy was re-opened by the but continued money printing and depreciation in the to pursuit of competitive exchange rate continued to create economic hardships, widespread strikes and social unrest.

There were two insurrections in 1971 and 1988/89 led by Marxists Janatha Vimukthi Peramuna (JVP) who tried to take over the entire country, and a 30-year civil war waged by Tamil Tiger rebels from the early 1980s for a separate state.

Groups in the north also first became active in the 1970s, assassinating mainstream politicians. All three were controlled with equally harsh military action.

Multi-Festivals

The protestors in 2022 are peacefully demanding changes to the way the country is governed and want more young people to come to office.

The tech-savvy youth voluntarily gathered, self helped with the food and water supply, found ways to continue the protest despite a New Year celebrated by ethnic majority Sinhalese and minority Tamils, Easter week celebrated by Catholics, and Ramadan fasting observed by Muslims.

The protest has now started to attract popular artists, celebrities, sports stars and elders to the demonstration while forcing many others to openly repent for backing Gotabaya Rajapaksa in the November 2019 polls.

Buddhist Monks, Catholic and Islamic priests, and Hindu devotees all came together for the protest.

Buddhist monks chanting “pirith” to bless the protesters, Catholic priests questioned Rajapaksa’s long delay of 2019 Easter Sunday attack probe, Muslims held their iftar or break fasting and prayers at the protest – expressing a rare unity in diversity.

“This generation is faster, more driven and are determined to have a change,” an elder protester who voluntarily came to the protest told Economy Next.

“The issue we face now is that the people within the boundaries of the government are more laid back to their views and don’t seem to understand the pace of the new generation. So obviously the protests will be long lasting.”

The political savvy among them are calling for constitutional change, involving the abolishing of the executive presidency which had destroyed a once independent public service by ending an independent civil service commission.

Sri Lanka Podujana Party using its two third majority had ended a constitutional council set up by a 19th amendment to the constitution which sought to go someway in setting up an independent judiciary and public officers, though nothing had been done to appoint permanent secretaries to ministries.

Social Media

Thousands of protesters have now established small tents at the protest site, medical facilities, a library to read, a people’s parliament to express the views of all and portable washrooms.

Food is given away freely to support those who are there for the cause. The sentiment around the camp is “we won’t go home till Gota goes home”.

They named the protest site as “Gota Go village”. They also have established a “Gota shop” to collect food and water for the protesters. The collection is coordinated through social media.

Political analysts see the latest protest as the biggest apolitical movement against the government in the last 74 years since independence.

Many protesters are making use of a nine-day holiday this week to show their dissent, undeterred by the Government’s sealing off of the historic Galle Face Grounds “for repairs”.

Some are continuously staying, while others participate “in shifts” due to time constraints. Many are braving the sun and rain to keep the protest going.

“I feel fortunate about the opportunity to come and contribute to this historic moment,” said Hiranthi Lakshika, a 38 year old woman told Economy Next.

” People are suffering, but these leaders are continuing with misappropriation. I think people have understood something. That is why people have gathered here regardless of their ethnicities any religion for the first time in the history.”

“Despite all these problems, there is no plan for revival and there are hardly any brains in the government to think of any revival.

“Sri Lanka is not poor. We are very rich in terms of the country’s location. These politicians have repeatedly raped this country and many youths have already left this country. If all join hands, we can develop this country.”

“Rajapaksas have proven us repeatedly that they are corrupt and they have no concerns for the public. So Gotabaya and Rajapaksa family should leave. There is no compromise on that. If they don’t leave, you will find how these youths will force them to leave.”

In addition to money printing, a key policy error of the current administration was a fertilizer ban backed by the Government Medical Officers Association which had said ancient Sri Lankan lived for over 100 years before agro-chemicals came.

“Gotabaya has destroyed out agricultural economy. He has pushed this country back my many years,” said W Priyantha, a 42-year old farmer who has come from Ratnapura.

“He also has appointed all corrupt ministers and the country is suffering.”

Farmers were the first to protest against the administration last year during the fertilizer ban, long before the urban middle class started to protest.

Braving the elements

Protestors brave the sun and rain to stay in the protest site which has now been named GotaGoHome gama.

“I was there only for a few hours today, and I was exhausted. The heat was unbearable,” T N Nawas, who comes into Galle Face every day since the protest started.

“I can’t imagine what it’s like for the people who are there the whole day.

“People were protesting under umbrellas and holding their placards as shades. The weather is just extreme, it’s extremely hot during the day and it suddenly starts to rain with massive lightning bolts.”

Protesters share news, thoughts, and anecdotes via WhatsApp, TikTok, FaceBook, Instagram, and Twitter among many other social media platforms keeping in touch with the rest of the country.

“I’m constantly updating myself and other people on social media, and building an archive of sorts of historical events that people might not be aware of,” said 20-year-old Sarasi Lakpura from Nugegoda.

She is unable to take part in the physical protests.

Rajapaksa’s ruling Sri Lanka PodujanaPeramuna (SLPP) ran an election campaign targeting Sinhala Buddhist majority and Catholics in the last two polls after the 2019 Easter Sunday attack by Islamist suicide bombers that killed at least 269 people mainly Catholics.

The SLPP also said choosing Rajapaksa was the only option to protect Sri Lanka’s sovereignty, national security, while promising justice to the victims of Easter Sunday’s carnage.

During their campaign Sri Lanka Podujana Party activists carried lion flags without the coloured strips representing minorities.

But the 2022 protestors wave the full national flag.

Pix by T.N. Nawas

Pix by T.N. Nawas

Some also drape themselves in it.

In recent months several persons linked to the Sri Lanka Podujana Party and others who were facing corruption charges were released with cases being withdrawn.

Last week lawyers protested in front of the Attorney General’s office demanding cases, which were withdrawn on technicalities be re-filed.

More Protests?

The current protesters are from urban middle and middle-class youth who are experiencing shortages and power cuts for the first time in their life. Most have never taken part in a protest in their lives.

They are protesting for a political system change to go back to their comfort zone.

However, with the economic crisis has started to trickle down gradually to the grass root levelsmore could join the “Go Gota Home” campaign soon.

Suffering at grass root levels is rising. However they cannot leave their job or livelihood to come and join the protests on a long term basis.

“If those people who are waiting in the kerosene lines join us, this whole situation will change drastically,” said protester Ravindra Wijesekera.

“They think in a different way. They won’t lay low and speak nicely. And if that happens it will be very hard for the government to control the situation,” he said.

To save the falling rupee the central bank has to now stop printing money and find money to pay the salaries of a bloated public sector by taxing people and businesses, under a planned International Monetary Fund program.

Though people now know that there were no shortages during earlier IMF programs or such steep currency falls, the coming tax hikes and to pay the public sector and high rates to sell domestic debt is likely to trigger a downturn in the private sector.

In a bid to reduce pressure on the domestic economy and release resources for a reasonable growth path eventually, the IMF has pushed the country to re-structure foreign debt.

Pix by T.N. Nawas

Many of the protesters are angry not just with the Rajapaksa family, but 225 parliamentarians in general who enjoy tax-free cars, pensions after five years for themselves and family members appointed as personal staff and subsidized luxury meals at parliament.

Suresh Udawatte is a committed protestor whose business is in shambles says as hardships increase more people will join the protests.

Udawatta serves shifts at the protest site to be a part of the “Go Gota Home” movement.

His sign reads, “Our children’s milk was stolen for the luxuries of your own children!”

The atmosphere at “Gota Go Village” is shown by its shiny new trilingual sign, and the feeling of community and energy that is there in the crowd, even as the protests continue well into the night.

“There’s a cohesive force that isn’t dying out until we have fulfilled our motives,” said a committed protestor asking not to be named holding a placard saying: “Sri Lanka is not Poor, we aren’t poor, we were robbed.” (Colombo/April 13/2022)

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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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