By Basil Fernando –

Basil Fernando

Part-3: Crash of the Monetary System & Constitution making in Sri Lanka

Some people think that the crash of the monetary system is simply an economic problem. Perhaps, some may question the connection between the monetary system and the Constitution. The occurrence of a financial crisis is not only an economic problem. The basic legal framework of the country applies to both the occurrence of a financial crisis and the prevention of such a crisis. In fact, the legal issue is more powerful than an economic issue in creating or preventing a financial crisis.

The background of the current financial crisis facing Sri Lanka has been created by indiscriminate borrowings. Inability to repay the loan instalments and interest component has grown up to a dollar deficit in the state treasury today. It has become a root cause of almost all other problems in the country.

Could this situation have been avoided if certain constitutional principles had been followed? This is a very important issue affecting not only the current crisis but also one that will help eliminating the occurrence of such crises in the future.

The stream of legal concepts surrounding this crisis is based on the wide deference –contrasting like black-and-white that prevails between the two concepts: the rule of law and arbitrariness. Arbitrary rule is legally defined as the ability to make decisions arbitrarily, ignoring the rule of law. How has the arbitrariness affected Sri Lanka in procuring loans? The law will determine the steps to be followed to prevent catastrophic and prejudicial consequences of every action that takes place in the country. It could be done by establishing a very clear legal framework for obtaining loans and allowing it to take place only within that framework. In other words, the procurement of loans outside the established legal framework will be made illegal; also a methodology will be introduced within the legal tradition itself to discourage and gradually stop the procurement of loans. Also, devising strategies to ensure that the conditions imposed are strictly adhered to will constitute a function of the legal system. Thus, the law will create an orderly system for every action being pursued by the government and grant it the legal authority for functioning.

Accordingly, if the system of obtaining loans in Sri Lanka had been properly designed and regulated with appropriate checks and balances, a situation could have been created in which the controls were imposed on obtaining excessive volumes of loans and using such loans for economic progress of the country. The law will set out a specific procedure to be followed when loans are obtained. A country should have a legal framework that revolves round all natural conditions which are usually addressed in obtaining loans such as, what is the need of obtaining a loan? In what sources is it expected to be obtained? How could the loans obtained be managed in a way that it will not prove to be detrimental to the country? What is the procedure to be followed to repay the loan etc.

The following are some of the basic criticisms on borrowings today: To a large extent borrowings have been used as an alternative source of generating money for consumption which should have been generated through economic production. One commentator has remarked that Sri Lanka’s budget is not an estimation of revenue and expenditure, but an estimation of debts. The rulers had made it a habit to borrow money to meet consumption expenses of the country.

The States that obtain loans should act in a prudent manner, the way an average intelligent person does, when he or she resorts to obtain a loan. They ought to realise that obtaining a loan is basically a matter that can have dire consequences. Therefore, if there is no real strategy to prevent those dismal consequences, they tend to refrain from securing loans so as not to fall prey to those consequences. It is deeply embedded in the public consciousness that if an ordinary person obtains a loan and fails to repay it and the interest payable on it; he is likely to lose his property and even to be plunged into the street. Consequently, the difficulties faced by those who have acted without prudence are deeply ingrained in the psyche of the people. Accordingly, it remains a part of wisdom and intellect that people inherit from generation to generation. In spite of this awareness there are some who ignore it and get into trouble again and again, and eventually realise that the common wisdom is in fact based on true facts.

A country is not a private property of anyone. It is a public property system. Therefore, simply allowing the incumbent ruler to decide on the procurement of loans and placing on him the responsibility of avoiding undue consequences of borrowings could be described as an undesirable practice that might lead to adverse consequences. It is therefore important that the collective wisdom is used always in imposing limits which are generally accepted for management and control of public or collective property.

There two important elements involved in the process of obtaining a loan, the need for doing it in such a way as not to cause damage to public or collective property and finally, the desire to achieve the collective good.

The management of any process requires a specific knowledge relevant to that process. Rowing a boat in a river requires some order to be followed. Anyone who does not know the order or fails to follow it will inevitably be compelled to face the consequences of it. In this way the knowledge of the ferryman is different from that of a driver. The wisdom of the driver is different from that of an engineer. Similarly, the knowledge of debt management is based on a subtle process that is inherent in each of the disciplines of money transactions. They have become accepted traditions followed by every country. Therefore, obtaining loans is something that any country can do, but the ability to control debts is not something that any country can do as it pleases. The basic principles that exist in this regard should be followed, and the ability to adopt those principles ought to be acquired.

What we experience in Sri Lanka is a crisis created by the abandonment of limits of burrowing and obtaining loans haphazardly and in arbitrary manner regardless of consequences, particularly during the post-1978 period. Borrowing more and more to solve the crisis created by persistent borrowing has gradually escalated the crisis reaching the point where it is no longer possible to borrow any more today.

This process has to be handled under legal control. The proposed new legal framework should be based on a system which is open, accountable, and capable of monitoring those processes; and it should include adequate provisions to prevent prejudicial actions revealed by the monitoring process and restrictions imposed not allowing anyone to work outside those provisions.

This is done through the rule of law. It could only be achieved if there is an effective legal framework and law enforcement system that can help maintain the rule of law in the country. The basic structure of this order will be created by the Constitution, the supreme law of a country. All the other laws are made based on the Constitution. Thus, the disregard of laws which have been enacted in conformity with the provisions of the Constitution will necessarily amount to violating the Constitution itself. It will become a crime committed against the entire nation. The financial stability of the country could be achieved only by preventing the rulers from violating the laws of the country.

However, it was absolutely an opposite process that had prevailed in Sri Lanka since the 1960s. In other words, the Constitution has been made an invalidated document by breaking the rule of law, and in that context the rulers had gained ability to act in defiance of all relevant laws, thus being able to act at their own will and pursue an extremely destructive borrowing policy.

This has been done by undermining the Constitution, the supreme law of the land. The appointment of an Executive President above the Constitution meant the reign of arbitrariness over the law. This is not just a question of individuals, but a complete abandonment of the concept of the rule of law. Although the term ‘rule of law’ is included in the Constitution and other laws in word, the ‘obstinate person’, by subtly undermining the Constitutional Law, has been able to exacerbate his obstinacy over and above all the laws. This situation is the main source of the current financial crisis and the resulting dollar crisis facing the country.

Therefore, the people who have received an opportunity to formulate a new constitution in good faith should seriously intervene to strictly control the borrowing process by making the new constitution a meaningful document giving priority for the rule of law and subjecting the ruler, the head of state to the rule of law.

One major doubt about the borrowing process in Sri Lanka is that most of the money borrowed through many loans have been syphoned off for corruption and also to produce wealthy tycoons who have reaped the benefit of a good share of loans obtained for their personal advantage. Consequently, the entire parliamentary system and the country are in a state of degeneration. The politicians as a breed have lost their recognition and integrity. The milieu in which the politicians were considered a virtuous lot has largely disappeared from the country. The whole system is overwhelmed by an air of extreme dissatisfaction.

The reason for this is not just an issue of individuals, but a situation created by obstacles encountered in the functioning of the country within a legal framework. A stable financial system could be created in Sri Lanka by removing the obstacles to the rule of law and strengthening the obstructions to control and resist arbitrariness. To do that, a fundamental legal document that reigns supreme over the rule of law and deprives all those who oppose it of their powers, should be formulated and enacted as the main law or the supreme law of the country. That is where the connection between the Constitution and the financial control of the country lies.

*To be continued..