UNP’s path to economic calamity | Daily News

UNP’s path to economic calamity

Three UNP strongmen, MPs Eran Wickramaratne, Dr. Harsha de Silva and Mangala Samaraweera in a recent public statement declared that the “Economy is at edge of an “abyss”!

The sum total of their predicament is as follows;

* Political turmoil which has led to a credit rate down grading;

* Challenging debt payments leading to higher interest rates;

* As Speaker has said Cabinet is dissolved Finance Minister cannot obtain money from Consolidated Fund;

* Wants the President to accept their decisions so that the budget can be passed;

Except the credit rate down grading, Mangala Samaraweera and company are responsible for all others.

We are aware that the UNP was in complete control of the economic affairs of the Government till October 26, continuously being at the helm, from January 2015.

The current warning and the splash came in the wake of an announcement by Moody’s Investors Service stating that they have downgraded the GOSL foreign currency issuer and senior unsecured ratings to B2 from B1 and the outlook from negative to stable.

However, the CBSL which is established under the Monetary law Act to administer and regulate the monetary system of the country- Immediately following Moody’s statement, announced that Moody’s rating decision is unfounded. The CBSL gave the following reasoning;

* There is no change in the macro-economic policies;

* Steps are taken to maintain adequate reserve levels and to raise funds for debt repayments;

* Detailed out the possible swaps with friendly countries;

* Improved domestic financing systems ensuring better debt management;

In absolute economic terms CBSL has confidently reassured the manageable position of the economy based on Active Liability Management initiatives already in place which were even endorsed at the recent review stage of the IMF’s Extended Fund Facility.

The country is faced with the dilemma of believing whom on this issue, Mangala Samaraweera and company harbouring a grievance on account of their unexpected termination or the CBSL charged with the duty of securing Economic and price stability and financial system stability of the country.

According to its track record, the CBSL has NOT failed to date in fulfilling any of these wider objectives despite the slamming and tarnishing of its image by Arjuna Mahendran who was appointed as its Governor at the insistence of Ranil Wickremesinghe, the then Minister in charge of the CBSL, who is now a fugitive evading arrest for an alleged financial crime committed during his tenure.

With regard to the “political turmoil” leading to the so called ‘instability’, we are constrained to state that this is an impasse created by Mangala Samaraweera and Company itself. When the President of the country acting under the constitutional provisions appointed a new PM and a new Cabinet (the constitutionality of which is not challenged hitherto), instead of following the normal established parliament procedure they started making a futile attempt to preempt a derogatory course of action by handing over a piece of paper purported to be a NCM against the Government and demanding an immediate voting on it against procedures laid down in the standing orders of Parliament. By their own action of amending the contents of that paper on a subsequent sitting of the Parliament (the purported NCM) it is now proved that they have taken a vote on a worthless paper.

From this it follows that the current imbroglio is the creation of the prosecutors themselves and if there is any economic abyss that the country is confronting it is also due to their own mishandling of the affairs during the period of their control.

We have to examine three things in this regard;

I. Whether the current situation is political instability per se;

II. Whether the rating agencies are accurate in their focus on the issue;

III. The actual reason for the dismissed Government to behave in this manner.

POLITICAL INSTABILITY

One of the basic factors taken into consideration in this determination is the propensity for a regime change. The current scenario in the country is an issue pending before Parliament. The people have given a mandate to all MPs to form a government of their choice according to the constitutional provisions. Any one or more political groups of this Parliament forming a Government should not be considered as an unprecedented political typhoon or a tsunami. In fact the correct perception should be to regard this as yet another political formation among the duly elected members of Parliament.

Existence of violence, assassinations and harmful demonstrations etc. are other reasons for attributing instability to the polity. There appears to be some kind of a concerted effort to purposely create such a scenario.

* Statements made by UNP politicians during the period the Parliament remained prorogued to the effect that there will be a blood bath when Parliament meets,

* Alleged carrying of knives into the floor of the House by two identified UNP MPs.

* The street demonstrations and fast unto death programmes

These appear to be calculated steps towards this ulterior-motive to portray the existence of a tense situation in the country.

There is no coup or any military interventions in the democratic functioning of the Government. Hence it is inappropriate for any agency, organisation or a country to spectacle the current scenario as a political instability!

MOODY’S ROLE

Moody is another internationally accepted rating organisation. It is one among the three big credit rating agencies, viz. Standard and Poor (S&P), Fitch Group and Moody’s. Their purpose is to rank the Borrower’s credit worthiness using a standard rating scale. In the process they measure the investor loss in the event of default. Their authenticity is derived from recognition by the SEC of USA. They are affiliated to NRSRO of USA., known as Nationally Recognized Statistical Rating Organization. When a rating grading is given by an NRSRO agency the investors use that as a guide line to evaluate their risk factors and decide on the investment.

Each rating agency has its own nomenclature for ratings. But according to Moody’s ratings B1 to B3 are judged as highly speculative and running a high credit risk. Their current downgrading is from B1 to B2.

This shows that even before the downgrading our rating was in the speculative, high risk range.

The UNP which was controlling the economy should be held responsible both for their policies for the state of affairs before the down grading and to their behavioural conduct contributing to create anarchy and a false sense of violence to provide the ground for Moody’s to further downgrade it.

It is also pertinent to refer to the operations of these credit agencies in the historical perspective to get a clear idea about the limitations of their applications in the rating exercises. Moody is an old established company with a history of over 100 years. They also had their downgrading at different times. Eg. 1980 - Australia; 1990 - Canada and Japan; 1997- Thailand. In 1907, during a financial crisis Moody was forced to sell his business due to a shortage of capital. Their sovereign ratings too have come under severe criticisms. Several countries had to suffer heavy financial losses due to increased cost of borrowings as consequences to downgrading of the ratings in those countries.

More recently during the Sub-Prime mortgage crisis their role came under heavy attack. In 2007 they were engaged in a critical exercise of downgrading their own Ratings. There were repeated downgrading of earlier rates due to their erroneous nature. Cost of borrowings went up due to the downgrading. This situation worsened in 2008 during the World Financial crisis.

History also records instances where MOODY’s were sued by the investors. In worst case scenarios Moody’s had to pay heavy settlement claims in litigations against them.

It is reported that they have paid as settlement claims nearly $864 million in 2017.

There have been instances where the rating given by different rating agencies on the same borrower varying considerably. The case of Greece is an example. Because of these factors no investor will take the rating as the only guide line to determine their investments.

If they can rely on independent authentic statistical data they would take such to consideration.

The Central banks and Reserve banks are the best sources in this regard. They normally do not go shopping round the rating agencies demanding favourable rates. Hence the ratings given by Agencies have to be taken with a pinch of salt beyond any attributed infallibility.

DOWN GRADING OF SOME COMMERCIAL BANKS

This is another blow that has flared up during the prevailing calamity. The banking Industry in the country was a completely abandoned field during the past three years of the RW managed government. In the first instance under the shoddy allocation of subjects of ministries, banks were taken out of the Ministry of Finance and were even subject to undue interferences in their operations. The worst affected were the State Owned Banks. The infamous instruction by a Minister of Finance to State banks where they were dictated to make certain predetermined offers at the CBSL bond auctions now stand established at a Commission of Inquiry. The Government has resorted to commercial borrowings from several including local and foreign banks. In this exercise the State Sector banks were virtually compelled to lend to SOEs under tremendous pressure exerted. There have been instances where the Government securitized those borrowings through namesake Treasury papers / comfort letters.

It is in this background that MOODY’s have announced their new downgraded credit rates in respect of a few banks. The adduced reasons are;

a. Increasing trend of the Non-Performing Loans (NPL percentages)

b. Tightening of external financial conditions

c. Domestic political instability

These factors have contributed to

I. Capital out flows

II. Increase of exchange rates

III. Depletion of foreign currency reserves

These are a direct result of the economic bungling of the RW/UNP government during the last three years. The unfavourable business climate and corruption activities that went on unabated have caused the banks to increase their NPL percentages. The actual figures show that the cumulative NPL percentage has risen to 3.6% from 2.8% between 2017 and 2018.

The International Industry standards have been significantly increased thus bringing heavy pressure on the local Banks to raise their reserve levels and asset portfolios.

The ever changing economic policy strategies within short spells due to vacillating government planning was the main cause for disturbed business climate in the country. The accelerated economic transformation envisaged under the Ranil Wickremesinghe Vision plan for 2025 prepared on the guidance by Haward University’s Centre for International Development was a mere stillbirth. It did not serve any purpose other than the satisfaction granted to the bilateral US agencies which were linked to the Institutional network of the policy planning in this country.

Nevertheless the Vision 2025 cost us $ 3 Million in addition to the $2.3 Million spent by RW government to establish a Central programme Management Unit in the Prime Ministers’ Office.

The Cabinet Committee on Economic Management (CCEM) Headed by RW and assisted by his adviser Razeen Sally was found to be extremely ineffective and was disbanded by the President. This is the economic scenario that contributed to the stagnating Domestic instability that ultimately precipitated the current stalemate leading to downgrading of ratings.

Mangala Samaraweera and Company has to be reminded of the several utopian strategies like the

* Wi -fi Syndrome;

* Volkswagen episode

* One million new jobs for local and foreign job seekers facilitated under trade agreements

* The creation of a Singapore style Tamasek model Investment fund to invest our EPF, NSB, Insurance and ETF fund monies;

* Land alienations to foreign investors in lots exceeding 50,000 acres in extent;

* Colombo Port and Trincomalee Port programmes which were in the RW vision pipeline.

These are the factors that have apparently influenced the rating agencies to take into account under “Domestic Policy instability” for rating purposes. The Ranil Wickremesinghe regime is directly responsible for the state of affairs and it is not a matter connected with the recent political changes.

In addition our attention is also drawn to the establishment of several institutions with and without foreign Direct and indirect influences to manage the economic planning and development under the previous government headed by Ranil Wickremesinghe.

The institute of policy studies, initially co financed by the Dutch Government including other donors such as Canada, UK, Norway and several other US corporates, banks and equity funds;

Advocata Institute, launched at the Lakshman Kadirgamar Institute as an independent Public Policy Think Tank working towards a free and prosperous Sri Lanka.

Millennium Challenge Corporation is a unit located within the Strategic Policy Development Unit of the Prime Minister’s Office. The objective of this MCC is to influence the regulatory environment and rule of law in the South.

It is seen that Wickremesinghe has relied on former Sri Lankans including Arjuna Mahendran (Singapore), Razeen Sally (Singapore), Suri Ratnapala (Australia) as well as prominent foreign personalities in the Economic field such as George Soros, Professor Ricardo Hausmann of Venezuela, Joseph Stieglitz (who came as the chief guest of the former Prime Ministers 2023 agenda for economic prosperity) for his Vision to build Sri Lanka.

The sudden change of Government has therefore caused a serious disorientation in his activities as well as his commitments to the Western world.

What we witness today as the response of his party to the changing political scenario appears to be due to this.

So if there is an abyss before us all we can state is “When we came abreast of the crevasse, we could see through it to the country beyond!” 


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