Reproduction
Bond-smacked in 2015, Public Scolding in 2020:
June 19, 2020, 4:34 pm
by Rajan Philips
A
new normal has landed. In a stunning development last week, Sri Lanka’s
President upbraided Central Bank’s senior officials, and before that
Bank of Ceylon officials, for apparently failing to follow government
directives and implement specific measures to stimulate the ‘lockdown’
or ‘social-distance’ economy. The bankers were not given the benefit of
social distance in what a newspaper called, "back-to-back barrage on the
banking sector."
The specific trigger for the meltdown in
protocol was the Central Bank’s apparent failure to implement a
"proposal made by the President to provide Rs. 150 billion worth of
refinancing to banks by accepting the outstanding due as collateral."
According to the President, "the Government owes a huge sum of money to
companies due to mismanagement in the past;" and this is the outstanding
due that the government wants to "be kept as a security for banks to
release loans to them. Then they can run the economy. This is a money
circulation process. This is a very simple tactic and this is a basic
economic principle. But, what are you doing?" The President riled.
The
Central Bank officials said nothing during the barrage. They went back
and with the approval of the Monetary Board announced the rolling out of
new credit schemes to provide commercial banks with additional
concessionary funds for a total of Rs 150 billion, to lend to businesses
at 4% interest "to revive the economy." In addition, as has been
reported, "a new dedicated credit scheme funded by the Central Bank" is
to be made available at the same concessionary rates to the
"construction sector enterprises," whose unpaid outstanding dues would
appear to be at the root of all the public scolding, to borrow from
licensed commercial banks, using guarantees issued by the Government
equivalent to the amount on past due contract payments.
In a
parallel development, Sri Lanka’s Tourism Development Authority has
reached an agreement with the Bank of Ceylon, under which the Bank will
provide loans at 4.0 percent interest to hotels and travel agencies and
restaurants registered under the Tourism Authority, to pay salaries for
144,000 persons for the next six months, based on the EPF/ ETF records
supplied by registered tourist industry employers, subject to a
corporate guarantee or personal or independent guarantor acceptable to
the bank. In addition, the Bank of Ceylon announced its readiness to
extend its facilities to multiple sectors as well reduce interest rates.
Meeting with People’s Bank’s officials, days after his meeting Central
Bank officials, President Rajapaksa called on the state banks "to
utilize relief announced by the Central Bank to strengthen the economy
and the people affected by COVID-19 pandemic."
In what might
be seen as a Main Street/Bank Street split, the President’s rebuke has
been welcomed by some as a long overdue antidote to alleged reluctance
in the banking sector to "think outside the box" and to be preoccupied
with "theoretical reasons" against expanding credit or money supply.
Businesses, who complain about the firewall at the banks that stop them
from getting loans, are now happy that the President’s intervention will
finally bring much needed relief. A spokesperson for small and medium
businesses has expressed confidence that "we can now be optimistic of an
economic revival." As well, while welcoming the 4% interest rate, small
businesses also favour credit being disbursed "on a business basis and
on business track records rather than on a collateral basis, because a
majority of small businesses have had "massive losses and are unable to
show significant collaterals at the moment."
On the other
hand, the barrage on the banks has caused head scratching in the more
conventional banking and business circles, who also fear of the fall
outs for the country’s precarious external sector and financial
credibility abroad. To think outside the box, it has been said, one must
be used to thinking inside the box, first. Suffice it, for now, to take
note of the birth of a new-normal economic principle in Sri Lanka, that
if the government owes money to a company or companies for
contractually provided goods and services, and if the government is
unable to make those payments, then it can direct the country’s banks to
extend loans to those companies using their outstanding dues as
collateral, for the stated purpose of letting the companies run the
economy.
This is a new understanding of the concept of
economic stimulus, and a new paradigm for banks and their depositors in
the utilization of money that is held between them in law and in trust.
Although, there are ways to utilize depositors’ money for public
purposes within the law and without breaking trust.
For want of a parliament
What
the President’s advisers may not have informed the President is that in
no country in the world, only the Central Bank, or the banking sector,
has been solely responsible for taking initiatives to address the
current Covid-19 economic crisis. Everywhere, governments, legislatures
and the banks have acted aggressively but in concert with one another.
By far the only exception is Sri Lanka, where there is no legislature to
deal with a totally unprecedented health and economic situation. And it
is equally totally unfair to blame the Central Bank for apparentlynot
doing what other Central Banks are doing, when everywhere the Banks are
not doing anything alone except in co-ordination with their respective
governments, especially their legislatures. Put another way, for want of
a parliament in Sri Lanka, the poor Central Bank got blackguarded.
In
the US, Federal Reserve Chair Jerome Powell has met several times with
(Democratic) Speaker (of the House of Representatives) Nancy Pelosi and
Treasury Secretary Steve Mnuchin, but hardly ever with (Republican)
President Donald Trump. And last week, while Sri Lankan Central Bank
Governor and officials were getting their dressing down, Chair Powell
and fellow Governors were appearing before US lawmakers to report on the
state of the US economy in the midst of the coronavirus crisis. Anyone
who follows these matters will know that the US Congress (the House and
the Senate) passed legislation with unprecedented (Republican and
Democratic) bipartisan support, approving two trillion US dollars as
‘relief package’ for the American people. The Federal Reserve only
provided the monetary tools for implementing a good part of the relief
package (as it should be properly called as there is nothing to
stimulate when the economy is shut down to escape the virus).
It
has been the same story of joint action by legislatures and Central
Banks in practically every country with a constitutional government,
presidential or parliamentary. Sri Lanka, to repeat, is the sole, and
sore, exception. In India, the articulate former Congress Finance
Minister never misses a moment to criticize the Modi government and its
Finance Minister, Nirmala Sitharaman, for coming up short on fiscal
initiatives to match the monetary policies initiated by the Reserve Bank
of India.
To add a different comment, in passing, the once
highflying Modi government is now beleaguered on all fronts, including
the Himalayas. Besides taking the blame for the mounting Covid-19 cases,
the Modi government has to pacify its enraged Hindutva supporters and
explain what it is going to do after the loss of 20 Indian soldiers in a
literally sticks and stones border battle with the Chinese. The BJP has
to come up with better ways to govern than scapegoating Muslims,
browbeating Pakistan, clamping down on Kashmir, and, now, getting into a
border fight with the Chinese. The fickle nature of political fortunes
should not be lost on the new Administration in Colombo.
Nor
should it be lost on the Administration that Sri Lanka’s Central Bank
had already initiated measures analogous to those by other Central
Banks, but acting within far greater constraints. What is missing in Sri
Lanka, and to a far greater extent than practically anywhere else and
especially among other South Asian countries, are the matching fiscal
initiatives. It is no secret that Sri Lanka’s economic situation was in
terrible shape even before COVID-19, and that creates huge limitations
for the Central Bank’s maneuverability.
While central banks
in developed economies can make decisions and operate with relative
independence from external forces, their counterparts in developing
economies are constrained to be far more mindful of the external
implications of domestic initiatives, especially the implications for
balance of payments and the currency. This has been the case ever since
international capital flows and trade became more important than foreign
aid for developing countries. It is unreasonable, therefore, for Sri
Lanka’s political leaders, President Rajapaksa now and former Finance
Minister Ravi Karunanayake previously, and now again, to blame the
Central Bank for not aggressively dancing to the tunes of their
fly-by-night advisers.
And to publicly pick on the qualifications and
salaries of bank officials is terribly beyond the pale.
It
is a strange coincidence that in two August, or not so august, elections
- first in 2015 and now in 2020, the Central Bank is caught in the eye
of the political storm. Although there is no political storm to speak of
for the upcoming election, President Gotabaya Rajapaksa chose to remind
Central Bank officials of the 2015 bonds scam: "You were there when the
Central Bank bonds scam was executed, he said. "If you supported them
to commit this crime, there is no reason for all of you not to join
hands with me to deliver justice. Public must be made aware of the issue
of how we move forward with this kind of officials. The people of this
country have bestowed a great power on me to build this country. I
request all of you to allow me to build this country."
It is
stranger logic to suggest, while invoking the electorally bestowed
power, that someone who allegedly was party to an earlier crime should
join hands with the government to deliver justice. Perhaps that is the
way political karma now works in Sri Lanka - those who commit crimes in
one regime, get a second chance to deliver justice in the next. The
truth of the matter is that no one from the Central Bank who met with
the President may have had anything to do with the 2015 bond scam, or
anything before or after. And Professor W.D. Lakshman who stepped in as
Governor as a matter of national service – he too had to be at the
receiving end of the barrage.
Hopefully, he received some personal
apology, either before or after the scolding.
Regardless of individuals,
it is the institutions that are being tarnished. The Parliament is
irreparably damaged.
The Central Bank is now taking its turn.
What will
be next?
Postscript:
In my article last Sunday (Archaeology
politics and prejudice clouding Vistas of Prosperity and Splendour),
there was an inadvertent error in the attribution of the Ibbankatuawa
archaeological excavation in Dambulla.
The Ibbankatuawa (IBB) megalithic
cemetery was first excavated by Raja De Silva of the Department of
Archaeological Survey of Ceylon in 1970. A dozen years later, in 1982,
the late Senake Bandaranayake recommenced excavation as part of the
Dambulla cultural triangle project.
Excavations continued intermittently
in 1983/84, 1986, and again from 1988 to 1990. Priyantha Karunaratne
was involved in the excavation both at the IBB cemetery and the nearby
IBB settlement area.
I acknowledge the information kindly provided by
Manel Fonseka.
