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 fallouts 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 application 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 apparently not 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.
It is not only the parliament that is missing in action, but also the cabinet. The Central Bank and the banking sector come under the finance ministry. But the Minister of Finance is no where in the picture as the President chooses to deal directly with the banks without involving the subject minister. The fact that the President and the Prime Minister are brothers does not mean that the basic protocols of cabinet government can be breached. Sibling solidarity is not a substitute for cabinet government.
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, P. Chidambaram, 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 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.