By W A Wijewardena –

Adverse economic consequences of executive action

In a flash move, Parliament was dissolved last Friday by President Maithripala Sirisena, claiming he had powers to do so under the Constitution. It was not a sudden executive action, but the culmination of a series of actions he had been taking during the previous 14-day period. It all started when he sacked the incumbent Prime Minister Ranil Wickremesinghe and appointed the former President Mahinda Rajapaksa in his place on 26 October 2018.

Since Wickremesinghe refused to step down and continued to claim his right to premiership, there were two Prime Ministers, one sacked and the other just sworn-in. As I pointed in a previous article, it had led to a man-made constitutional crisis needing a quick fix to save the economy from a possible collapse.

Instead, the President prorogued Parliament till 16 November, claiming again that the new Government under Rajapaksa needed more time to prepare a Budget. The opposition cried foul play, but he continued to appoint Ministers for various portfolios in several rounds, giving priority to those who had crossed over from the ruling United National Party.

Meanwhile, the Ministry of Finance, on the direction of Rajapaksa who got the finance portfolio, had announced a relief package, nicknamed ‘midnight goodies’, causing a derailment of the Government Budget from the path it had taken toward better budgetary management in the recent past. The adverse consequences of this move on the economy, taxpayers and the exchange rate were analysed by me in a previous article.

When the pressure was built by the international community for reconvening Parliament to enable it to choose the Prime Minister, the date of reconvening the Parliament was advanced by two days to 14 November. The dissolution orders were issued when Parliament was to be reconvened on this date.

Debate over the constitutionality of the President’s action

The constitutional crisis has spawned a live debate about the constitutionality of President’s action among many citizens. Those debaters are composed of a cross-section of the community, such as politicians, lawyers, academics, civil right activists, and religious leaders.

Those who support the President argue that he has discretionary powers in the Constitution to hire and fire a PM, prorogue or reconvene Parliament, or dissolve Parliament. For them, what he has done is totally in accordance with the Constitution.

Those who oppose him, drawing on the literal meaning of different sections in the Constitution, present a case where he does not have such powers in the Constitution at all. Both sides have generously been supported by lawyers, who have accordingly begun to enjoy a field day in educating the public of the issue at hand.

Sri Lanka is a republic and not a monarchy

However, it appears that those who are in the debating mode have forgotten that Sri Lanka is a republic – a democratic socialist republic for that matter – and not a monarchy. The discretionary powers claimed by those who are supporting the President are in fact enjoyed only by a monarch. Even then, according to ancient Indian tradition, as postulated in The Laws of Manu, a guide book for kings to follow written around 3rd century BCE, a king should use his discretionary powers for the benefit of all those in his kingdom who look up to him for protection, survival and prosperity.

Says Manu in Chapter 7 of the Laws: the king has power to punish people but he should not use it discretionarily but in accordance with accepted laws and principles. One question which he should ask himself when meting out punishments is whether his use of powers would make everyone happy in the kingdom. If the Rod of Punishment is used properly with due consideration, it makes all subjects happy, while improper use will destroy everything. Therefore, even in the case of monarchs who are supposed to have discretionary powers, those powers should be used only with one objective in mind. That is, whether the exercise of those powers will lead to greater happiness among the subjects. If they do not, the king is advised by Manu not to use those discretionary powers.

Heads of republics should have prior training

The case of a republic – derived from Latin to mean ‘an entity of people’ – is completely different. Today, the head of a republic is designated President, meaning one who presides over an entity of people.

Hence, he has no powers which are not being enjoyed by the people who belong to the entity that he presides over. Plato, the Greek philosopher who lived in the 5th to 4th centuries BCE, presented the case of a city state which he called the republic in the book carrying the same title.

The contents in the book are presented in the form of a dialogue between Plato and his Guru, Socrates. Plato does not call the head of the republic the President, but the Guardian. For a republic to function properly, he insists that the Guardian should be a philosopher who has been trained in that art thoroughly before he assumes that position.

A philosopher here is not in the modern sense of a philosopher, but one who knows the right and the wrong, and could avoid the wrong if it is to the detriment of the people in the entity. When Socrates probed into that conception by questioning Plato whether it would be possible to train a greedy human in the art of philosophy, Plato gives the example of a dog who would always do things to please his master. If a dog can be trained in that art, so could a human being too. It is difficult but not impossible, according to Plato.

Presidential action should be through consultation

When we examine the behaviour of the Guardians of republics today throughout the world, we observe that in a majority of cases, they do not show the signs of being pre-trained in that art altogether. Those who elect them to guardianship never ask the question whether they had undergone a similar training and acquired the needed discipline. As such, they are just elevated to that high position, even though they do not possess a proper understanding of what a republic is, or what role they should perform in their new position as guardians.

If they have been trained, they would always use those so called discretionary powers in consultation with the main stakeholders. This applies to the whole range of work they do as guardians, such as the appointment or the dismissal of a Prime Minister, prorogue, convene or dissolve Parliaments, and fixing dates for conducting elections.

Even though Great Britain is not a republic but a monarchy, the monarch has always followed these rules to the letter. A similar practice is found in other dominions like Australia, New Zealand, and Canada. Even in Sri Lanka, before the promulgation of the 1978 Republican Constitution, the Governor General or the President, as the case may be, had the habit of consulting the Prime Minister whenever he had to perform these duties by the people. In the case of the present Constitution, this requirement has not been written into law, but the fact that it is a republic and not a monarchy has made it clear that such a consultative process is necessary before the President uses his discretionary powers. Since Sri Lanka’s present President had not followed this process in his executive actions in the last two weeks, his action has not been in accordance with the Constitution.

Huge economic costs of Presidential actions

The economic costs of what the President had done in the last 14-day period have been enormous. Two international credit rating agencies, Moody’s and Fitch Rating, had flagged Sri Lanka over the uncertainty created by the constitutional crisis created by the President.

The corollary would be for Sri Lanka to pay a higher interest rate when it goes to the market to borrow in foreign exchange in order to repay its maturing debt. As a clue to this, the prices of all sovereign bonds which Sri Lanka had issued in the past had fallen across the border, the deepest being the bonds due to mature in a few months’ time. As a result, the present market interest rates on these bonds have increased by about 2% to 5% in the last two-week period.

As I have argued in my previous article under reference, the constitutional crisis has brought in uncertainty and the markets do not like it. When they react to this uncertainty, they punish the market participants ferociously. This is already evident in the case of the operations of the share market and the Government securities market. In the case of the share market, the foreigners had sold on a net basis shares amounting to about Rs 8 billion or $ 45 million. In the Government securities market, the total sales have been about Rs 21 billion or $ 120 million. Altogether, foreigners who do not like uncertainty have taken out of Sri Lanka about $ 165 million and it has put pressure for the rupee to depreciate in the market. This is indeed a dreadful experience for those in power, as well as those who are being ruled by them.

Impact on the Budget

The flash dissolution of Parliament has created another vital issue for the country’s budgetary operations. The Budget for 2019 was to be presented to Parliament on 5 November. However, due to the prorogation of Parliament a week before that date, the presentation of the Budget was made a non-event. It was then reported that the Government was contemplating to present a Vote on Account to Parliament when it was to be reconvened on 14 November.

A vote on account

A Vote on Account is not a budget but permission given by Parliament to the Ministry of Finance to continue for the first three months of 2019 with the same expenditure, revenue, and borrowings, as approved by Parliament when it passed the Budget for 2018. The weakness in Votes on Account is that they do not contain new budgetary policies, and therefore are not aligned to the on-going reform program relating to Sri Lanka’s budgetary policy. To cover the balance 9 months after the lapse of the Vote on Account, a proper budget was to be presented by the new Government to Parliament. Though it is a better option than not having a budget at all, that mini-budget would not be able to present a comprehensive set of new budgetary policies. As such, as far as the budgetary reforms are concerned, the year 2019 will be a complete write-off.

Rescue clauses authorising President to spend money

When the Parliament was dissolved before it could meet on 14 November, this option too became a non-event. Now, Sri Lanka does not have a budget for 2019 and as a result, the Ministry of Finance would not be able to raise revenue for carrying out the public services in the country. However, sections 150 (3) and (4) of the Constitution provides for the President to authorise the payments for public services and the costs of the general election out of the Consolidated Fund of the Government for three months. These sections are rescue sections in the absence of a proper budget or a Vote on Account approved by Parliament, which has the authority concerning the public finances of the country. However, when implementing this, the Ministry of Finance will meet a new set of difficulties.

Consolidated Fund is a cash-flow account

The Consolidated Fund is simply a copy of the cash book of the General Treasury. It starts with an opening balance at the beginning of the year. All tax and non-tax revenues, interest incomes and proceeds of loans are added to that opening balance. Then, from the total fund availability, expenditure of the Government on account of both recurrent and capital items, payment of interest and repayment of loans are deducted. The closing balance is then taken forward for the next year.

Consolidated Fund in Sri Lanka doesn’t have money

Because of the deficit financing which Sri Lanka has been incurring throughout its post-independence history, the opening and closing balances of the Consolidated Fund are always overdrawn. It is similar to the overdraft balance in the bank account of a private entity. According to the Annual Report of the Ministry of Finance for 2017, at the beginning of the year, the Consolidated Fund had been overdrawn to the extent of Rs 187 billion. With a very bad budgetary operation during the year in which out-payments were much bigger than the inflows, the year had ended with an overdrawn balance of Rs 286 billion. The latest number available for 2018 has been that pertains to the end of April 2018. As at that date, the Consolidated Fund had been overdrawn to the extent of Rs 145 billion.

How to fill the gap in the Consolidated Fund

What it means is that in terms of the Constitution, the President can authorise payments out of the Consolidated Fund. But without new revenue sources, it would always be in deficit and to finance the deficit, the Ministry of Finance will not be able to borrow money, since that borrowing program has not been approved by Parliament. Hence, due to the flash dissolution of Parliament before a proper budget or a Vote on Account is approved, Sri Lanka will run into a serious budgetary crisis.

Not too late to unravel the entanglement

It appears that the President has moved from one mistake to another through his executive action done without proper consultation in the last two-week period. This has entwined the whole country and the economy in an entangled web of mistakes. It is still not too late for him to unravel this entanglement.

*W A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, could be reached at waw1949@gmail.com