Starvation in Sri Lanka: Is it A Product of Policy Makers and Professionals? – Part 1

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Self-sufficiency in food was the focus of the agriculture sector policy in Sri Lanka, even before the independence. But the quality and the display of the local food items offered to consumers in the market are yet to be improved substantially. The prices are exceptionally high compared to many citizens’ purchasing power and the country’s per capita income. According to the Household Income and Expenditure Survey -2019, Sri Lankans’ average monthly household expenditure on food is 35.1%, leaving a low share for non-food expenses, which is an indicator of the poor quality of life. The situation could be much worse among the middle and low-income groups, and the malnutrition level is increasing. Sri Lanka’s agriculture, especially the food crop subsector, is yet to be modernised with new technology and commercialised. Despite those constraints, the country had reached near self-sufficiency in essential food items by 2022.

The aftermath of Covid-19 and the government’s policy mismatches suddenly brought the country into a catastrophe in 2022 without sufficient local or imported food. According to the Colombo Consumer Finance Index, food inflation in September 2022 has risen to 94.9 %, which means citizens’ food affordability has been reduced by almost 50%. According to the FAO, 78% of the population suffered from food insecurity in the latter part of 2022. Most people attribute the whole responsibility for the food crisis of 2022 to banning agrochemicals. Though it was the immediate and foremost reason, several other structural issues have aggravated the situation. The situation could be returned to the pre-2022 position in a few seasons after lifting the ban.  Still, the shortcomings inherited over a long period in local food production may continue unless those are adequately addressed. Food prices are yet to come down to match the income levels of the majority through improved productivity and quality. Therefore, this article aims to understand the present food crisis in relation to the policies and strategies followed by the different governments over eight decades and their pros and cons. The focus is to discuss some remedial actions based on historical evidence and my brief experience in the sector.

The Sri Lanka National Agriculture Policy paper, prepared by the government in 2020, says, “The agriculture sector will continue to play an important role in the application of strategies targeted towards planned socioeconomic development of the country. Rapid growth for the agricultural sector, particularly the domestic food production, floriculture, and export crop sectors, is essential to achieve self-reliance at the national level, ensure food security and bring about equity in the distribution of income and wealth for alleviating poverty.” It shows that policy-wise, the government has firmly committed to developing the agriculture sector as a strategy for macroeconomic development. According to the population figures in 2021, eighty-one per cent of Sri Lanka’s population lives in rural areas. As per the labour force statistics, in 2021, 27.3 % of the total labour -force was employed in agriculture. Still, their contribution to the GDP was only 6.9%, which shows that the farming population is relatively poor. As a cultural practice, almost all rural people in Sri Lanka engage in agricultural activities in one way or another. If not for their main employment, they do agriculture as a source of supplementary or secondary income or at least to produce their food. As such, the Sri Lankan labour force engaged in agriculture is much higher than the figures shown in labour force statistics. Despite many drawbacks, local food production had increased considerably by 2023, but at a very high cost to the public coffer for over eight decades.

Evolution

Under the colonial administration, plantation crops were the priority sub-sector of agriculture. Domestic agriculture, especially food production, was not a priority. In 1931, under the Dhonurmore Constitution, the decision-making power for local matters was substantially transferred to the State Council of Ceylon, represented by elected local representatives. Since then, the translation of nationalism and patriotism into action was commenced in many aspects of society. D. S. Senanayake’s vision as the Minister of Agriculture and Landin the State Council of Ceylon was that colonising the thinly populated dry zone is the only solution to land hunger poor peasants in the densely populous wet zone, self-sufficiency in rice and food security.D.S. Senanayake’s imagination in the colonisation programme seems to create a group of contented middle-class farmers like the rural elites in the traditional villages. Accordingly, 5-10 acres of irrigated and high lands were alienated to colonists. It was also expected to reduce the increasing pressure on land to produce food and housing in the hill country and the wet zone and generate full-employment opportunities for the peasant community. Accordingly, he prioritised domestic agriculture and the Dry Zone Colonization programme. After becoming the first prime minister of Ceylon in 1947, his son Dudley Senanayake was appointed as the minister in charge of the subject to continue the programme with the same priority. Also, the second World War outbreak validated the need for food self-sufficiency. The food scarcity in the war environment encouraged the peasantry to food production and the colonisation programme. During wartime, in 1942, a scheme to purchase paddy under a guaranteed price well above the market price was also established. Since then, the guaranteed price for paddy, above the market price, has become a permanent feature.

The colonisation scheme was a massive and ambitious program involving the supply of irrigation and drinking water, social and physical infrastructure, housing, land clearance for farms, settlement of people in a complex, unfamiliar environment, establishing the public administration and public service delivery system, etc. All settlers were allocated an equal extent of land, which could not operate with the family labour. Different from the wet zone, there was no agricultural proletariat or social arrangements to work on medium size farmlands, especially during the cultivating and harvesting periods. Unlike in the wet zone, sharecropping arrangements (Ande Cultivation) or hiring casual labour was impossible, as all settlers were landowners. Farm mechanisation was also rare in the early stages, but many colonists became unemployed during off-seasons. Unlike in the wet zone, there were no modern large plantations to find wage employment during off-seasons. The colonisation programme reinforced the same peasantry agriculture in local food production, creating a dichotomy between plantation agriculture and local food production. Though there were many economic and social issues at the beginning, with continuous and substantial government supports, these colonisation schemes became sustainable. In addition to the above programmes, in line with the then policy, government-owned farms were also established in different parts of the country under the department of agriculture. These were considered model farms to introduce new farming technics, increase food production, create wage employment, seed production, etc.

The colonisation program helped to reduce the population pressure in the wet zone and increase rice production to a certain extent. However, it was an extension of the area under cultivation with the traditional smallholder farming system, more than increasing productivity under modern farming practices using technology.  Also, most of the second and third generations of settlers became unemployed. Many of the settlers were socio-economically backward and needed to gain experience even in agriculture at the beginning. Under this socio-economic environment, only a few entrepreneurs ventured into non-agricultural activities to generate employment for the second and third generations.

Green Revolution

Though there were some shortcomings in the D.S Senanayake’s Agriculture policy and strategies (expansion of the area under cultivation through land alienation, irrigation facilities, colonisation, model farms, and guaranteed paddy prices Etc.), its positive factors were attractive. The policy continued without many changes during the Bandaranaike governments from 1956 to 1965. In 1965, Dudley Senanayake’s government also prioritised the agricultural sector and continued along the same path. Moreover, the international program of the Green Revolution influenced the agriculture policy and the program in this period. The agriculture sector benefitted from the productivity improvement agenda of the green revolution, such as farm mechanisation, chemical fertiliser, highbred seed, pesticides, weedicides, etc. Consequently, productivity and local food production have significantly increased.

In addition to the smallholder sector, the Dudley Senanayake government gave prominence to large-scale farming, enabling the transfer of new technology and thereby reducing the cost of production, improving quality, and providing wage employment for the rural poor. To this end, his government leased relatively large plots of land in the dry zone to the corporate sector and entrepreneurs. The government facilitated lessees to import machinery, equipment, vehicles, etc. This is a deviation from the previous policy of the dry zone colonisation program at a high cost to the national budget and reinforcing the smallholder system. However, large-scale farms and large landholdings were not compatible with the Land Reform Policy of Mrs Bandaranaike’s government, which came into power in 1970 with a coalition of left-wing parties. Under the land reform policy, land ownership was limited to 50 acres per person. Most of these farms were acquired by the government or abandoned by the owners due to the fear of acquisition and lack of government policy support. If this programme had been continued, it could have become much cheaper than colonisation schemes to create employment, increase production and productivity through technology, and transfer the technology to local farmers.

The newly established Mahaweli Programme had much potential for large-scale commercial farming. The open economic policy had been introduced by this time, and trade was liberalised. But the government followed the same concept of smallholder farming. Several large land blocks of marginal lands without water and infrastructure have been leased out to entrepreneurs. Due to the threats of wild animals, lack of water, agriculture proletariat and other infrastructure, the tenants abandoned most of such blocks. They passed them on to several hands with little development. All settlers in Mahaweli were equally poor, and most could not purchase agricultural equipment. Unlike their original villages, in the beginning, there were no entrepreneurs who could afford to hire equipment for small-scale farmers. If extensive holdings had been allocated to entrepreneurs randomly on arable lands, they could have been instrumental in diversifying and changing the economic structure. It could have been a facility for the poor settlers to obtain inputs and other services required for farming and daily needs. Also, they could have generated employment in off seasons and for the second generation. Sri Lanka missed both opportunities (Mahaweli and Dudley’s leasing scheme of more extensive holdings) to establish large-scale private-sector farming for rice and other food crops. If Sri Lanka had utilised the above opportunities, the food crops subsector would have been commercialised and modernised, leading to high quality and low cost with value addition, like in many other countries.

Import Ban/Restriction of Food Items

During the 1970/77 period, the policy of self-sufficiency in food and the promotional strategies for local food production has been further strengthened through import controls. Regulations were introduced to reduce rice consumption and encourage the consumption of locally gowned pulses, yams, grains, etc. A massive Food Production Drive named ‘’WagaSangramaya” was launched in 1973, and a vast enthusiasm was created among the citizen to cultivate and economise the food. All government-owned farms were fully utilised, increased seed production and introduced new crop varieties. Import bans resulting in high prices encouraged the cultivation of marginal land and uneconomical crops to the country’s agroecological condition. This overenthusiasm led to the mal-allocation of land and other resources and high-cost and low-quality products. The ban on importing all food items was not a result of the 5-Year Development Plan of the then government. Still, it was necessitated due to the foreign exchange crisis, like the situation in 2022. Before the 1970/77 period, local food production was mainly a subsistent activity of poor peasants. Due to the import restrictions, a dichotomous situation has been created in domestic agriculture. While poor peasants were doing subsistent farming, some people commenced commercial agriculture aimed at the broader local market but at low quality and high prices. However, during this period, many import substitutes, such as lentils, chillies, yams, milk, sugar etc., emerged from subsistent farming to commercial farming. Suppose the government had continued tariff protection and advisory services, with corrective measures for a few more years. In that case, some products with comparative advantages could have been established as viable economic activities.

Sluggishness

The free trade policy introduced in 1977 allowed the import of almost everything without restrictions. The market was flooded with imported cheap food and consumer items creating a new demand for foreign exchange. The newly open trade sub-sector did not increase the foreign exchange earnings to match the increased need for food imports. Due to the sudden and unplanned trade liberalisation, commercial farmers could not face the competition from imported foods and were compelled to abandon farming. It resulted in rural unemployment, especially among the agricultural proletariat. The poor peasants, who could not integrate with the new economic order, remained subsistence farmers. The Banking system also prioritised the trade sector, which is less risky and profitable than agriculture lending. Domestic agriculture lost the policy support and backup services such as research, seed production, extension services and bank lending. Meanwhile, Mahaweli Authority established its own system to provide advisory and input services for Mahaweli farmers undermining the regular agriculture department’s authority.

The Department of Agriculture is one of the oldest departments in the country, manned by highly qualified professionals. Sri Lanka had a well-organised extension service for the food crop sector under its department of agriculture, integrated with research, demonstrations, model farms, demonstrations, in-service training for officers and a comprehensive field network comprising district-level officers (assistant directors), subject matter specialists, zonal officers (agriculture instructors) and village-level officers (KrushiVyapthiSevaka). The extension division and the research arm at the centre supported the field network. From time to time, different systems of extension service have been experimented with and implemented nationwide with uniformity. As such, extension service has been developed over the years through an evolutionary process till the late 1980s.

After establishing the provincial council system in 1987, agriculture extension was devolved to provincial councils. Since then, the sub-national level network of the extension service has lost connectivity with research and other divisions of the Agriculture Department and the Ministry. Also, the village-level extension staff (KVSs) were absorbed into the cadre of Grama Niladari, creating a vacuum at the field level. Later, in 1999 a new cadre of field officers named “Agriculture Research and Production Assistants” was appointed, but they did not have professional qualifications or experience in research or extension works. They coordinate agriculture inputs delivery and enforce agriculture-related Acts of Parliaments such as the Agrarian Development Act, The Paddy Land Act etc.Agriculture extension, especially the food crops sub-sector, has been severely affected after the devolution of power to nine independent provincial councils. Occasionally extension programmes are being implemented by provincial and national agencies without proper coordination between the two levels. Sometimes, those are incompatible with each other. Since the government has an aloof attitude toward the extension service, unprofessional business-minded agrochemical vendors are filling the vacuum with non-scientific advice. Therefore, a comprehensive national policy and strategies with a coordination mechanism at the national and sub-national levels are paramount.   The extension service needs more recognition from the government at both national and provincial levels. When the government attempted for organic farming-only policy, vacuums of the extension service were visible. There was no field network of extension staff to educate farmers on organic farming, and neither the farmers nor the fertiliser vendors had scientific and practical knowledge of organic farming. 

Contented at a Low Level of Achievements

For several decades, with some degree of ups and downs, a unique smallholder farming system has been developed in the country with a combination of government subsidies, some degree of tariff protections, some elements of subsistence farming and the modern agriculture techniques introduced under the green revolution (highbred seeds, chemical fertiliser, other agrochemicals, modern machinery, and equipment etc.). Under this equilibrium, the labour component of the farm inputs has decreased, and the land and labour productivity increased considerably. The country became nearly self-sufficient in rice, vegetable, fruit, and coarse grains such as maise production. Inputs supplies, prices, farming practices, farmer behaviours, consumer preferences and logistic aspects had stabilised to match this equilibrium (sufficient quantities at a relatively high price and low quality, but all stakeholders are substantially satisfied). So, to a considerable extent, the security of essential food items was ensured through local productions.

Moreover, those developments have brought the country many social and environmental benefits. Childlabour, which was abundantly used under the traditional farming system, was released from farmlands enabling them to continue with education. The customary use of women’s labour in farming was also considerably reduced, allowing them time for childcare, family welfare and other non-agricultural activities. In addition to the family food needs, most farmers could produce a marketable surplus that improved the physical quality of life. The Chena-farming (slash and burn) system, which increases the demand for land and harms the environment, has been reduced dramatically. Instead of moving from one land to another, farmers started cultivating the same land regularly with the blessing of the improved farming system. Consequently, many new settlements have developed with urban facilities, which changed the lifestyle, bringing many social and economic benefits.

Interruption

However, during the Government of good governance (Yahapalana Government), from 2015 to 2019, except for chemical fertilisers, other necessary agrochemicals, especially weedicides,were suddenly banned. Sri Lanka depended for many decades on agrochemicals for weed and pest control.By this time, farmers had lost the traditional knowledge of insects and weed control.The Chena Farming system, which doesn’t require agrochemicals also not in practice. Characteristics of improved/highbred seeds were incompatible with conventional weed and pest control practices. Farm labour was not readily available, and the cost of manual wedding had become high. It is yet to develop planting and weeding tools/machinery and planting practices appropriate to our agroecological conditions, soil conditions, and terrain and acceptable to smallholder farmers. This new situation mainly affected tea plantations and Paddy cultivation. Seed broadcasting, the paddy cultivation practice commonly used by farmers, is inappropriate for mechanical weeding. So, farmers could not positively respond to the new challenge. Consequent to the new challenge, farmers faced increasing production costs, while productivity fell below the previous years. Some farmers abandoned the cultivation. After banning the agrochemicals, the Paddy production in the 2016 Yala season dropped to 1,517,392 metric tons from 1,942,408 metric tons in Yala, 2015. Further, the production of the 2016/17 Maha season has fallen to 1,473,832 from 2,902 693 metric tons in the 2015/16 Maha season. This downfall is not purely attributable to the agrochemical ban; climatic and other factors may have contributed to it.

For many years, the use of herbicides had been promoted as a cost-cutting technic in the tea plantation. When labour became more expensive, weedicides became a blessing in disguise for the tea plantations to reduce the cost of production.  Like the paddy sector, the country had not developed planting methods and appropriate tools/ machinery for weed control in tea plantations. Consequently, the cost of production increased, and productivity dropped. In 2016, tea production fell to 292,000 metric tons from 328,960 tons in 2015.

The Sri Lanka National Agriculture Policy- 2020 accepts that the productivity of the agriculture sector in Sri Lanka still needs to improve. It further says, “The agriculture sector was also not geared to absorb the rural unemployed compared to the other sectors of the economy. It is necessary to reverse this trend and improve the agricultural sector to meet the aspirations of the people, particularly that of the farming community.” Further, the policy highlights the need for promoting the production and utilisation of organic and bio-fertilisers and gradually reducing the use of chemical fertiliser through the Integrated Plant Nutrition System, ensuring timely availability of chemical fertilisers in sufficient quantities, and providing soil and plant testing facilities for their rational use and minimising the use of synthetic pesticides through promoting bio-pesticides and integrated pest management.  This policy and strategy about agrochemicals seem sensible and timely. However, any attempt to absorb the ever-increasing unemployed into agriculture would be an attempt to share poverty with the second and third generations.

Going Backword

While farmers were attempting to adapt to the situation created by banning agrochemicals by the the Mithripala government, banning the import and use of chemical fertilisers without prior notice, preparedness, and alternatives by the Gotabaya government in April 2021, affected the entire society and the economy facing famine by much of the population. It is contradictory to the documented policy and strategies of the agriculture sector.  The move is suspected of an attempt to save US$ 300 to 400 million in foreign exchange, which the country spends annually to import fertiliser. Before the public, the President justified this move as the remedy to prevent increasing kidney disease and materialise the Sri Lankans’ rights to non-toxic food. He further promised to compensate for the income loss due to organic fertiliser application and import organic fertiliser to fill the gap due to the sudden decision. He also expected Sri Lanka to be the first to adopt the 100 per cent eco-friendly organic farming policy.

The farmers’ attempt to produce organic fertiliser in homesteads failed due to a lack of sufficient biomass and the long gestation period. Fertilisers produced by some entrepreneurs were of inferior quality, not acceptable to farmers and many malpractices were evident. An attempt to import organic fertiliser from China failed due to the debate on quality and procedural issues. The desperate government attempted to import organic liquid nitrogen from India. But that also ended up with quality issues and corrupt practices. The production loss was enormous, and the government did not have sufficient funds to compensate for the income loss of farmers. Eventually, the government ended up with a nightmare of wasting more foreign exchange, which was in short supply, to import fertiliser and essential food items. The outcome is creating a black-market price for agricultural inputs and food items. Towards the end of 2022, 78% of the population became food insecure.Most of the farmers abandoned the cultivation of seasonal crops. The productivity and quality of plantation and perennial crops have dropped drastically. Paddy production in the 2021/22 Maha season dropped to 1,931,230 metric tons from 3,061,394 metric tons in the previous Maha season. The average production per hectare also dropped from 4,307 Kg. to 2,853 kg.

After creating a big socio-political and economic nightmare, the government wriggled out of the concept of organic farming. Restriction for importing and using agrochemicals, including chemical fertiliser, was removed in early 2022, leaving long-lasting adverse effects. Though the ban was lifted, the agrochemical market was distorted by unscrupulous importers and traders, making the price unaffordable to farmers. This distortion may remain for a few more cultivation seasons. Perhaps some farmers who have left farming may not recommence. This nonsensical policy decision of 100% organic farming destroyed the entire agriculture sector built through subsidies and some degree of scientific inputs for more than 80 years. The government should have realised that the country doesn’t have sufficient biomass to produce the organic fertiliser required for 100% organic farming. Most of the land used for seasonal crops in Sri Lanka cultivate for 2 or 3 crops a year without a fallow season, leaving little room for the natural process of soil enrichment. Therefore, using a high dose of fertilisers is a must.

The Mithripal-Ranil government and the Gotabaya Rajapakse government justified the ban based on the assumption that the cause of chronic kidney disease of unknown origin is the continuous use of agrochemicals in agriculture. However, it is yet to be proven scientifically. Though we exaggerate the ancient glory, the high price, periodical and seasonal scarcity of food and starvation was common problem till the recent past, which highly affected the poor. Though agriculture has not developed as it should, consequent to the green revolution and the Mahaweli scheme, the food supply situation improved, and the price became affordable for most of the population. Whatever the economic and political issues we face from time to time, farmers cultivated without room for famine. The immediate impact of the organic food policy was that food inflation in September 2022 had increased to 94.9%, per the Colombo Consumer Price Index. According to a survey conducted by WFP in September 2022, more than 1/3 of the population is in food insecurity, which rapidly increases child malnutrition.  Though organic farming is a good move to provide healthy food, if the country continues with that policy, most people will not be able to afford the high price of organic food. They may face starvation and periodic and seasonal food scarcity again. Then, the better-off, who can afford the expensive organic food, would live longer, while the life expectancy of the majority is decreasing.

Layman consumers believe that the frequent insecticide/fungicide sprays on vegetables and fruits are more dangerous than weedicides and chemical fertilisers. The fundamental problem in Sri Lankan agriculture is not the use of agrochemicals but the overdose for various reasons. The farmers’ knowledge of fertiliser and other agrochemical applications in what quantity, time, soil types, type of pest etc., are limited. They learn by trial-and-error method, not by understanding the chemical composition. If one chemical is not answering, they use another. Vendors prescribe those, and vendors also learn from the trial-and-error experience of farmers. In most farmlands, broadcasted urea is exposed to sun and rain, allowing a considerable amount to evaporate, or wash off.

To be Continued

India: Fraud Cannot be Obfuscated by Nationalism – Hindenburg to Adani

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Hitting back at the Adani Group’s assertion that the Hindenburg report on the group is an “attack on India”, the US-based research firm has said that “India’s future is being held back by the Adani Group, which has draped itself in the Indian flag while systematically looting the nation.”

The Adani Group is trying to lead the focus away from substantive issues and “instead stoked a nationalist narrative, claiming our report amounted to a calculated attack on India,” the firm said.

“We believe that fraud is a fraud, even when it’s perpetrated by one of the wealthiest individuals in the world,” the US firm said in a scathing attack on the Adani Group. “To be clear, we believe India is a vibrant democracy and an emerging superpower with an exciting future,” it added.

On January 24, Hindenburg Research came out with a 106-page report, which accused the Adani group of “brazen stock manipulation and accounting fraud”.

“In terms of substance, Adani’s response only included about 30 pages focused on issues related to our report,” Hindenburg said on Adani’s response.

The US firm said the remainder of the response consisted of 330 pages of court records, along with 53 pages of high-level financials, general information, and details on irrelevant corporate initiatives, such as how it encourages female entrepreneurship and the production of safe vegetables.

“Our report asked 88 specific questions of the Adani Group. In its response, Adani failed to specifically answer 62 of them. Instead, it mainly grouped questions together in categories and provided generalised deflections,” the research house said.

“In other instances, Adani simply pointed to its own filings and declared the questions or relevant matters settled, again failing to substantively address the issues raised,” Hindenburg said, adding that the Adani response “opened with the sensationalistic claim that we are the Madoffs of Manhattan”.

“Adani also claimed we have committed a ‘flagrant breach of applicable securities and foreign exchange laws’. Despite Adani’s failure to identify any such laws, this is another serious accusation that we categorically deny,” it said.

“In short, the Adani Group has attempted to conflate its meteoric rise and the wealth of its Chairman, Gautam Adani, with the success of India itself,” the US firm said. “Of the few questions it did answer, its responses largely confirmed our findings, as we detail.”

“But before we get into those, we note that the core allegations of our report – focused on numerous suspect transactions with offshore entities – were left completely unaddressed,” it said.

News agencies

India: Adani Unveils ‘Everything’ to Rebut Hindenburg allegations

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Richest Indian Gautam Adani’s group on Sunday likened the damning allegations made by short seller Hindenburg Research to a “calculated attack” on India, its institutions and growth story, saying the allegations are “nothing but a lie”.

In a 413-page response, Adani Group said the report was driven by “an ulterior motive” to “create a false market” to allow the US firm to make financial gains.

“This is not merely an unwarranted attack on any specific company but a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India,” it said.

Stating that the allegations in Hindenburg Research’s January 24 report are “nothing but a lie”, it said the document is “a malicious combination of selective misinformation and concealed facts relating to baseless and discredited allegations to drive an ulterior motive”.

“This is rife with conflict of interest and intended only to create a false market in securities to enable Hindenburg, an admitted short seller, to book massive financial gain through wrongful means at the cost of countless investors,” it said.

It went on to question the credibility and ethics of Hindenburg, and said the mala fide intention underlying the report were apparent given its timing when Adani Enterprises Limited is undertaking one of the largest ever further public offering of equity shares in India.

“Hindenburg has not published this report for any altruistic reasons but purely out of selfish motives and in flagrant breach of applicable securities and foreign exchange laws,” it said. “The report is neither ‘independent’ nor ‘objective’ nor ‘well researched’.”

Activist short seller Hindenburg Research, the firm which caught global attention with takedowns of electric-vehicle makers Nikola and Lordstown Motors, alleged in a report on Wednesday that its two-year investigation found the Adani Group “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades”.

The report by the tiny New York firm that specialises in short selling has led to Adani group losing more than USD 50 billion in market value in just two trading sessions and Adani himself losing in excess of USD 20 billion, or about one-fifth of his total fortune.

Hindenburg called out the conglomerate’s “substantial debt”, which includes pledging shares for loans; that Adani’s brother Vinod “manages a vast labyrinth of offshore shell entities” that move billions into group companies without required disclosure; and that its auditor “hardly seems capable of complex audit work”.

Of the 88 questions raised by Hindenburg, 65 of them relate to matters that have been duly disclosed by Adani portfolio companies, Adani Group said. “Of the balance 23 questions, 18 relate to public shareholders and third parties (and not the Adani portfolio companies), while the balance 5 are baseless allegations based on imaginary fact patterns.”

It listed questions from the report and dismissed them as “false suggestions based on malicious misrepresentation of governance practices” or “manipulated narrative around unrelated third party entities” or “biased and unsubstantiated rhetoric”.

“We reaffirm that we are in compliance with all applicable laws and regulations. We are committed to the highest levels of governance to protect the interests of all our stakeholders,” it said. “The Adani Portfolio also has very strong internal controls and audit controls. All the listed companies of Adani Portfolio have a robust governance framework.”

The focus of the Adani portfolio and the Adani verticals is to contribute to nation building and take India to the world, it said.

“We will exercise our rights to pursue remedies to safeguard our stakeholders before all appropriate authorities and we reserve our rights to respond further to any of the allegations or contents of the Hindenburg report or to supplement this statement,” it added. 

Sources: PTI/ Agencies

Sri Lanka and IMF: Delusional Partners

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3 mins read

Here we go again. The International Monetary Fund (IMF) is in command of Sri Lanka’s economy, barking orders and making demands in an effort to restore macroeconomic stability. The pattern is a familiar one. Back in April 2022, Sri Lanka’s currency collapsed, having depreciated by 44 percent against the U.S. dollar since President Gotabaya Rajapaksa took office in 2019, and, according to our measure, inflation reached a stunning 74.5 percent per year. Sri Lanka even suspended payments on its external debt. Then the IMF fire brigade arrived.

On September 1, 2022, the IMF reached a staff-level agreement to support Sri Lanka’s economy with a 48-month lending arrangement of roughly $2.9 billion. Now, the IMF is withholding the cash until Sri Lanka raises corporate-income and value-added taxes, cuts government spending, and reaches a debt-restructuring agreement with two of its largest creditors, China and India. The IMF is confident that these measures, among others, will stabilize Sri Lanka’s economy.

There’s just one little problem. This is Sri Lanka’s 17th IMF program. In fact, Sri Lanka has been on IMF life support nearly continuously since 1965. None of the previous IMF programs have permanently stabilized Sri Lanka’s economy. Why should the 17th? As the famous, often-misattributed, quote goes: “Insanity is doing the same thing over and over again and expecting different results.” By this standard, both Sri Lanka and the IMF crossed the threshold of insanity long, long ago.

There’s little empirical evidence to suggest that Sri Lanka’s shiny new IMF program will be any more successful than the past ones. A recent working paper by researchers at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise analyzed the effect of IMF loan programs, in the three years following the adoption of a program, on macroeconomic indicators from 2000 to 2010. The authors found that IMF lending arrangements resulted, on average, in a 5.8 percent increase in the unemployment rate, while control-group countries — countries that faced similar economic circumstances but did not implement IMF programs — experienced an average 7 percent decline in unemployment.

Other indicators tell a similar story. Countries with IMF programs fared worse than control-group countries in terms of real GDP growth, real export-value growth, and in the reduction of government debt. This research suggests that many countries would have been better off without any IMF assistance at all.

Sri Lanka’s economy is still in bad shape. Since Gotabaya Rajapaksa was elected in November 2019, the Sri Lankan rupee has shed 52 percent of its value against the U.S. dollar. Using purchasing power parity, one of us (Hanke) accurately measures inflation in Sri Lanka at a roaring 106 percent per year as of January 12. Since May 2022, foreign reserves have officially hovered around $1.8 billion, but a reported $1.4 billion of those reserves are locked away in a swap with the People’s Bank of China. So, if Sri Lanka’s economy needs stabilizing and a positive confidence shock, and another IMF program is not the answer, what is?

It’s time for Sri Lanka to mothball its central bank and replace it with a currency board. A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. It is required to hold anchor-currency reserves equal to 100 percent of its monetary liabilities.

A currency board, unlike the Central Bank of Sri Lanka, has no discretionary monetary powers and cannot issue credit. It therefore imposes a hard budget constraint on the fiscal authorities. Its sole function is to exchange the domestic currency it issues for an anchor currency at a fixed rate.

Currency boards require no preconditions and can be installed rapidly. They have existed in some 70 countries. None have failed, including the one that one of us (Hanke), designed and installed in Bulgaria in 1997. It immediately smashed a hyperinflation, caused interest rates to plunge, forced the fiscal authorities to balance the budget, and, with its positive confidence shock, spurred economic growth.

Today, thanks to its currency board, Bulgaria has the second-lowest debt-to-GDP ratio of any country in the European Union. Even the IMF heaped praise on currency boards a year after the installation of Bulgaria’s. A 1998 IMF publication noted that “currency boards in many countries have achieved impressive economic results, both in achieving lower inflation than other exchange rate regimes and in stabilizing expectations after prolonged hyperinflation.”

As it turns out, Sri Lanka (formerly Ceylon) had a currency board from 1884 to 1950. In 1884, the largest financial institution in Ceylon, the Oriental Bank Corporation, experienced an acute liquidity shortage due to bad loans to coffee plantations and subsequently failed. This sparked a run on two other banks, the Chartered Mercantile Bank and the Bank of Madras. With the crisis escalating, the colonial government quickly established a currency board, issuing fully backed, convertible-on-demand government notes — paper money. With that, the crisis was history.

It’s time for Sri Lanka to do the one and only thing that will permanently remove it from the IMF’s intensive-care ward. It should revert to a currency-board system, like the one it had for 66 years.

Courtesy: National Review. Click here to read the original version of this article

A Vicious and Motivated Campaign to Malign Adani Group

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When an industrial group achieves spectacular growth, it is seen that those who cannot match the performance of the fast-growing group view such performance with surprise and disbelief.  In such circumstances, the armchair critics and the research and investigative organisations would try to   “invent and discover” some reasons for the rapid growth of the industrial group and in the process, the research organization would get media attention and come to the limelight.  There have also been cases and instances, where the competitors would try to indirectly launch campaigns against the fast-growing group and support negative campaigns so that the interest of the competitors would be protected.  There have also been cases where motivated environmental groups have scuttled projects by carrying out hate campaigns and stating unproven environmental violations against particular companies.

There have been many instances to show such motivated campaigns across the world for whatever reasons.

Two instances can be readily pointed out:

One is the Koodankulam nuclear project in Tamil Nadu in India, where a very vicious campaign was made against the project by so-called environmentalists and vested interests, which delayed the project by more than ten years. Now, the Koodankulam nuclear power project is operating quite well after commissioning, which clearly highlights the fact that all the allegations made against the Koodankulam nuclear power project were false and motivated.

Another immediate example is the Sterlite Copper project in Tuticorin region in Tamil Nadu, which is a large copper complex, which has been forced to be closed down by violent agitators, alleging   environmental violation. Sterlite Copper management denied all the allegations but the state government decided to close the unit permanently, fearing agitators.   The so-called environmentalists said that the Sterlite Copper was causing cancer in the local region and emitting noxious fumes, which was not true. Now, that the Sterlite Copper plant remain closed for around three years, it is clearly seen that there is no change for better in the atmospheric, soil or health conditions in Tuticorin region. This obviously proves that Sterlite Copper was sinned against rather than sinning.

Allegations against Adani group:

The present case of Adani group being accused of financial malpractices etc. by a US based research organization clearly falls on the same pattern as described above.

Many vague allegations have been made against Adani group such as family members occupying crucial posts, some unproven violations and preliminary notices issued against the group by government agencies which were suitably answered, artificially boosting share value in the market and so on.

Multiple activities in vital sector:

Adani group is involved in several field of activities including renewable energy, coal mines, seaport (Adani port), power transmission, telecommunication, airport management etc.  All these are well-planned profitable ventures if one can manage the business competently.

Adani group is a significant contributor to the industrial, infrastructure and economic growth of India and it is promoting technology and industrial growth, employment generation and conferring so many other benefits on the country as a whole.

The fact is that all these projects are managed with a reasonable level of competence by the Adani Group. The proof of the pudding is in the eating.

Not a loan defaulter:

While Adani group has taken large loan to finance the projects from financial institutions, there is nothing wrong in this, as these are legitimate methods to start and run any business activity. As the debt is serviced properly as per the terms of the agreement with financial institutions by Adani Group, this clearly show that the business is managed well.

Some sworn critics say that Adani group is debt-ridden. This is not true.  As a matter of fact, the total debt of Adani group is much less than several other groups as indicated below

A few companies with high debt ( In Rs. ‘000 crores )

While financial institutions and other agencies have extended loans or the public who have bought equity, there are no complaints from them. This obviously means that they are satisfied with the overall performance of Adani Group and all is well.

There are many ways of raising finances for operating business and so long as they are done as per the law, there should be no complaints.

 The allegation that Adani group has artificially boosted the share value in the market is totally baseless, as the market evaluates and reacts to the ground realities relating to the company and participates in the financial scheme of things promoted by the company, as per their judgement.

Is it motivated allegation?

One thing that cannot but be noted is that such allegations have been made by the US based research company against Adani group at a time when the group is launching FPO (follow on public offering).  Obviously, one may suspect that the US organization has the intention of sabotaging the efforts of Adani group.

The financing institutions around the world will certainly scrutinize the FPO launched by Adani group carefully and properly and would not be influenced by the findings of some armchair critics, who call themselves as researchers.

Gullible public being misled:

The fact is that when such vague allegations are made and somehow get adequate publicity in the media, gullible people get confused and become suspicious even without understanding the actual facts.

For example, it is ridiculous to see media reports that Adani group’s public offer price is around Rs.3112/- while the face value of the share is Re.1 /-  The absurdity of the view can be explained as follows.

“Suppose an organization was founded by the promoters with the face value of the share Re.1/- and when the company would develop and progress very well, then the market share value of this Re.1 /- face value could be much higher.  In some cases, it could be even as high as INR 2000 /- and more per share.  In such circumstances, when the public offering is done with a share price of around INR 3112/- , it  should not be interpreted as that Re.1 face value is being priced as INR 3112 /-

Let not Adani group waste time:

Adani group has said that it was considering legal action against the U S based research company and the research company has replied that it would face legal action.

The fact is that the armchair critical team in USA has really nothing much to lose by legal action and they would get huge publicity due to the protracted legal proceedings that may promote their business contacts. 

 Whereas Adani group, which has many projects which are under operation oi implementation and have many more future projects in view,  would find it difficult to divert its attention and time to fight a legal case in court.

 Adani group should ignore such detractors and save its valuable time and energy to move on with the process of contributing to the industrial and economic growth of the country.

Views expressed are the author’s own

India’s Adani: Beginning of the End?

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Shares of India’s Adani Enterprises (ADEL.NS) sank 20% on Friday as a scathing report by a U.S. short seller triggered a rout in the conglomerate’s listed firms, casting doubts on how investors will respond to the company’s record $2.45 billion secondary offer.

Seven listed companies of the Adani conglomerate – controlled by one of the world’s richest men Gautam Adani – have lost a combined $48 billion in market capitalisation since Wednesday, with U.S. bonds of Adani firms also falling after Hindenburg Research flagged concerns in a Jan. 24 report about debt levels and the use of tax havens.

The rout took shares of Adani Enterprises, the group’s flagship company, well below the offer price of its secondary sale, which had initially been offered at a discount.

The Adani Group is concerned about the fall in share prices but continues to be in wait and see mode as the share sale continues until Jan. 31, said two people with direct knowledge of the discussions.

India’s capital markets regulator is studying the Hindenburg report and may use it to aid its own ongoing probe into offshore fund holdings of Adani Group, two other sources said. Spokepersons for the regulator and Adani had no immediate comment.

Adani Group has dismissed the Hindenburg report as baseless and said it is considering whether to take legal action against the New York-based firm. It did not immediately respond to a request for comment on the regulator’s move.

With a net worth of $97.6 billion, billionaire Gautam Adani is now the world’s seventh richest man, according to Forbes, slipping from the third position he held before the Hindenburg report.

Adani met the county’s power minister R.K. Singh on Friday in New Delhi, according to a source familiar with the matter. The agenda of the meeting was not immediately known.

The billionaire hails from the western state of Gujarat, the home state of Prime Minister Narendra Modi. India’s main opposition Congress party has often accused Adani and other billionaires of getting favourable policy treatment from Modi’s federal administration, allegations the billionaire denies.

The stunning market selloff has cast a shadow over Adani Enterprises’ secondary share sale that started on Friday. The anchor portion of the sale saw participation from investors including the Abu Dhabi Investment Authority on Wednesday.

“The sell-off is seriously extreme … it has clearly dented the overall investor sentiment in the market,” said Saurabh Jain, assistant vice-president of research at SMC Global Securities.

Market worries extended to Indian banks with exposure to Adani Group’s debt. The Nifty Bank index (.NSEBANK) fell over 3%, while the broader 50-share Nifty index (.NSEI) was down 1.5%.

CLSA estimates that Indian banks were exposed to about 40% of the 2 trillion rupees ($24.53 billion) of Adani Group debt in the fiscal year to March 2022.

Source: The Reuters. Click here to read the complete report

Inside Corporate: Bitter Truth Behind India’s Adani

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Excerpts of the research paper published by Hindenburg Research

Today we reveal the findings of our 2-year investigation, presenting evidence that the INR 17.8 trillion (U.S. $218 billion) Indian conglomerate Adani Group has engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades.

Gautam Adani, Founder and Chairman of the Adani Group, has amassed a net worth of roughly $120 billion, adding over $100 billion in the past 3 years largely through stock price appreciation in the group’s 7 key listed companies, which have spiked an average of 819% in that period.

Our research involved speaking with dozens of individuals, including former senior executives of the Adani Group, reviewing thousands of documents, and conducting diligence site visits in almost half a dozen countries.

Even if you ignore the findings of our investigation and take the financials of Adani Group at face value, its 7 key listed companies have 85% downside purely on a fundamental basis owing to sky-high valuations.

Key listed Adani companies have also taken on substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing. 5 of 7 key listed companies have reported ‘current ratios’ below 1, indicating near-term liquidity pressure.

The group’s very top ranks and 8 of 22 key leaders are Adani family members, a dynamic that places control of the group’s financials and key decisions in the hands of a few. A former executive described the Adani Group as “a family business.”

The Adani Group has previously been the focus of 4 major government fraud investigations which have alleged money laundering, theft of taxpayer funds and corruption, totaling an estimated U.S. $17 billion. Adani family members allegedly cooperated to create offshore shell entities in tax-haven jurisdictions like Mauritius, the UAE, and Caribbean Islands, generating forged import/export documentation in an apparent effort to generate fake or illegitimate turnover and to siphon money from the listed companies.

Gautam Adani’s younger brother, Rajesh Adani, was accused by the Directorate of Revenue Intelligence (DRI) of playing a central role in a diamond trading import/export scheme around 2004-2005. The alleged scheme involved the use of offshore shell entities to generate artificial turnover. Rajesh was arrested at least twice over separate allegations of forgery and tax fraud. He was subsequently promoted to serve as Managing Director of Adani Group.

Gautam Adani’s brother-in-law, Samir Vora, was accused by the DRI of being a ringleader of the same diamond trading scam and of repeatedly making false statements to regulators. He was subsequently promoted to Executive Director of the critical Adani Australia division.

Gautam Adani’s elder brother, Vinod Adani, has been described by media as “an elusive figure”. He has regularly been found at the center of the government’s investigations into Adani for his alleged role in managing a network of offshore entities used to facilitate fraud.

Our research, which included downloading and cataloguing the entire Mauritius corporate registry, has uncovered that Vinod Adani, through several close associates, manages a vast labyrinth of offshore shell entities.

We have identified 38 Mauritius shell entities controlled by Vinod Adani or close associates. We have identified entities that are also surreptitiously controlled by Vinod Adani in Cyprus, the UAE, Singapore, and several Caribbean Islands.

Many of the Vinod Adani-associated entities have no obvious signs of operations, including no reported employees, no independent addresses or phone numbers and no meaningful online presence. Despite this, they have collectively moved billions of dollars into Indian Adani publicly listed and private entities, often without required disclosure of the related party nature of the deals.

We have also uncovered rudimentary efforts seemingly designed to mask the nature of some of the shell entities. For example, 13 websites were created for Vinod Adani-associated entities; many were suspiciously formed on the same days, featuring only stock photos, naming no actual employees and listing the same set of nonsensical services, such as “consumption abroad” and “commercial presence”.

The Vinod-Adani shells seem to serve several functions, including (1) stock parking / stock manipulation (2) and laundering money through Adani’s private companies onto the listed companies’ balance sheets in order to maintain the appearance of financial health and solvency.

Publicly listed companies in India are subject to rules that require all promoter holdings (known as insider holdings in the U.S.) to be disclosed. Rules also require that listed companies have at least 25% of the float held by non-promoters in order to mitigate manipulation and insider trading. 4 of Adani’s listed companies are on the brink of the delisting threshold due to high promoter ownership.

Our research indicates that offshore shells and funds tied to the Adani Group comprise many of the largest “public” (i.e., non-promoter) holders of Adani stock, an issue that would subject the Adani companies to delisting, were Indian securities regulator SEBI’s rules enforced.

Many of the supposed “public” funds exhibit flagrant irregularities such as being (1) Mauritius or offshore-based entities, often shells (2) with beneficial ownership concealed via nominee directors (3) and with little to no diversification, holding portfolios almost exclusively consisting of shares in Adani listed companies.

Right to Information (RTI) requests we filed with SEBI confirm that the offshore funds are the subjects of an ongoing investigation, more than a year-and-a-half after concerns were initially raised by media and members of parliament.

A former trader for Elara, an offshore fund with almost $3 billion in concentrated holdings of Adani shares, including a fund that is ~99% concentrated in shares of Adani, told us that it is obvious that Adani controls the shares. He explained that the funds are intentionally structured to conceal their ultimate beneficial ownership.

Leaked emails show that the CEO of Elara worked on deals with Dharmesh Doshi, a fugitive accountant who worked closely on stock manipulation deals with Ketan Parekh, an infamous Indian market manipulator. The emails indicate that the CEO of Elara worked with Doshi on stock deals after he evaded arrest and was widely known as a fugitive.

Another firm called Monterosa Investment Holdings controls 5 supposedly independent funds that collectively hold over INR 360 billion (U.S. $4.5 billion) in shares of listed Adani companies, according to Legal Entity Identifier (LEI) data and Indian exchange data.

Monterosa’s Chairman and CEO served as director in 3 companies alongside a fugitive diamond merchant who allegedly stole U.S. $1 billion before fleeing India. Vinod Adani’s daughter married the fugitive diamond merchant’s son.

A once-related party entity of Adani invested heavily in one of the Monterosa funds that allocated to Adani Enterprises and Adani Power, according to corporate records, drawing a clear line between the Adani Group and the suspect offshore funds.

Another Cyprus-based entity called New Leaina Investments until June-September 2021 owned over U.S. $420 million in Adani Green Energy shares, comprising ~95% of its portfolio. Parliamentary records show it was (and may still be) a shareholder of other Adani listed entities.

New Leaina is operated by incorporation services firm Amicorp, which has worked extensively to aid Adani in developing its offshore entity network. Amicorp formed at least 7 Adani promoter entities, at least 17 offshore shells and entities associated with Vinod Adani, and at least 3 Mauritius-based offshore shareholders of Adani stock.

Amicorp played a key role in the 1MDB international fraud scandal that resulted in U.S. $4.5 billion being siphoned from Malaysian taxpayers. Amicorp established ‘investment funds’ for the key perpetrators that were “simply a way to wash a client’s money through what looked like a mutual fund”, according to the book Billion Dollar Whale, which reported on the scandal.

‘Delivery volume’ is a unique daily data point that reports institutional investment flows. Our analysis found that offshore suspected stock parking entities accounted for up to 30%-47% of yearly ‘delivery volume’ in several Adani listed companies, a flagrant irregularity indicating that Adani stocks have likely been subject to ‘wash trading’ or other forms of manipulative trading via the suspect offshore entities.

Evidence of stock manipulation in Adani listed companies shouldn’t come as a surprise. SEBI has investigated and prosecuted more than 70 entities and individuals over the years, including Adani promoters, for pumping Adani Enterprises’ stock.

A 2007 SEBI ruling stated that “the charges leveled against promoters of Adani that they aided and abetted Ketan Parekh entities in manipulating the scrip of Adani stand proved”. Ketan Parekh is perhaps India’s most notorious stock market manipulator. Adani Group entities originally received bans for their roles, but those were later reduced to fines, a show of government leniency toward the Group that has become a decades-long pattern.

Per the 2007 investigation, 14 Adani private entities transferred shares to entities controlled by Parekh, who then engaged in blatant market manipulation. Adani Group responded to SEBI by arguing that it had dealt with Ketan Parekh to finance the start of its operations at Mundra port, seemingly suggesting that share sales via stock manipulation somehow constitutes a legitimate form of financing.

As part of our investigation, we interviewed an individual who was banned from trading on Indian markets for stock manipulation via Mauritius-based funds. He told us that he knew Ketan Parekh personally, and that little has changed, explaining “all the previous clients are still loyal to Ketan and are still working with Ketan”.

In addition to using offshore capital to park stock, we found numerous examples of offshore shells sending money through onshore private Adani companies onto listed public Adani companies.

The funds then seem to be used to engineer Adani’s accounting (whether by bolstering its reported profit or cash flows), cushioning its capital balances in order to make listed entities appear more creditworthy, or simply moved back out to other parts of the Adani empire where capital is needed.

We also identified numerous undisclosed related party transactions by both listed and private companies, seemingly an open and repeated violation of Indian disclosure laws.

In one instance, a Vinod Adani-controlled Mauritius entity with no signs of substantive operations lent INR 11.71 billion (U.S. ~$253 million at that time) to a private Adani entity which did not disclose it as being a related party loan. The private entity subsequently lent funds to listed entities, including INR 9.84 billion (U.S. $138 million at more recent substantially lower exchange rates) to Adani Enterprises.

Another Vinod Adani-controlled Mauritius entity called Emerging Market Investment DMCC lists no employees on LinkedIn, has no substantive online presence, has announced no clients or deals, and is based out of an apartment in the UAE. It lent U.S. $1 billion to an Adani Power subsidiary.

This offshore shell network also seems to be used for earnings manipulation. For example, we detail a series of transactions where assets were transferred from a subsidiary of listed Adani Enterprises to a private Singaporean entity controlled by Vinod Adani, without disclosure of the related party nature of these deals. Once on the books of the private entity, the assets were almost immediately impaired, likely helping the public entity avoid a material write-down and negative impact to net income.

Adani Group’s obvious accounting irregularities and sketchy dealings seem to be enabled by virtually non-existent financial controls. Listed Adani companies have seen sustained turnover in the Chief Financial Officer role. For example, Adani Enterprises has had 5 chief financial officers over the course of 8 years, a key red flag indicating potential accounting issues.

The independent auditor for Adani Enterprises and Adani Total Gas is a tiny firm called Shah Dhandharia. Shah Dhandharia seems to have no current website. Historical archives of its website show that it had only 4 partners and 11 employees. Records show it pays INR 32,000 (U.S. $435 in 2021) in monthly office rent. The only other listed entity we found that it audits has a market capitalization of about INR 640 million (U.S. $7.8 million).

Shah Dhandharia hardly seems capable of complex audit work. Adani Enterprises alone has 156 subsidiaries and many more joint ventures and affiliates, for example. Further, Adani’s 7 key listed entities collectively have 578 subsidiaries and have engaged in a total of 6,025 separate related-party transactions in fiscal year 2022 alone, per BSE disclosures.

The audit partners at Shah Dhandharia who respectively signed off on Adani Enterprises and Adani Total Gas’ annual audits were as young as 24 and 23 years old when they began approving the audits. They were essentially fresh out of school, hardly in a position to scrutinize and hold to account the financials of some of the largest companies in the country, run by one of its most powerful individuals.

Gautam Adani has claimed in an interview to “have a very open mind towards criticism…Every criticism gives me an opportunity to improve myself.” Despite these claims, Adani has repeatedly sought to have critical journalists or commentators jailed or silenced through litigation, using his immense power to pressure the government and regulators to pursue those who question him.

We believe the Adani Group has been able to operate a large, flagrant fraud in broad daylight in large part because investors, journalists, citizens and even politicians have been afraid to speak out for fear of reprisal.

We have included 88 questions in the conclusion of our report. If Gautam Adani truly embraces transparency, as he claims, they should be easy questions to answer. We look forward to Adani’s response.

Click here to read the complete report

Turkey Embassy in Colombo Requests Public to Beware of Frauds

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It has been brought to the immediate attention of the Embassy that some misinformation is being circulated in social media according to which Türkiye has been recruiting manpower in Sri Lanka”, the Turkish embassy in Colombo has noted in a press communiqué.

“The Embassy would like to hereby inform neither the Turkish Embassy in Colombo nor the Turkish Ministry of Interior are related or connected with such recruitment activities, seemingly organised by some private individuals,” the communiqué further asserted.

Sri Lanka: Central Bank to Maintain Same Policy Interest Rates

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The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 24 January 2023, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 14.50 per cent and 15.50 per cent, respectively. The Board, having noted the recent and expected developments and projections on the domestic and global macroeconomic fronts, was of the view that the maintenance of the prevailing tight monetary policy stance is imperative to ensure that monetary conditions remain sufficiently tight to rein in inflationary pressures. Such tight monetary conditions, together with the tight fiscal policy, are expected to adjust inflation expectations downward, enabling the Central Bank to bring inflation rates towards the desired levels by end 2023, thereby restoring economic and price stability over the medium term.

Inflation continued to decline as envisaged in recent months and is projected to follow a faster disinflation path 

Year-on-year headline and core inflation, based on both the Colombo Consumer Price Index (CCPI) and the National Consumer Price Index (NCPI), continued to decelerate in December 2022 for the third consecutive month, as expected. The downward adjustment in inflation rates is expected to continue through 2023, supported by subdued aggregate demand resulting from tight monetary and fiscal policies, expected improvements in domestic supply conditions, and the passthrough of easing global commodity prices to domestic prices, along with the favourable statistical base effect.

Domestic economic activity is expected to recover towards the latter part of 2023, compared to the large contraction in 2022 

As per the GDP estimates published by the Department of Census and Statistics (DCS), the real economy is estimated to have contracted by 7.1 per cent in the nine months ending September 2022, on a year-on-year basis. With tighter monetary and fiscal policies in place, along with disruptions to domestic supply conditions, real activity in the final quarter of 2022 is also expected to have remained subdued. The economy is expected to make a gradual recovery during the year supported by the expected improvements in domestic supply conditions, underpinned by the timely implementation of corrective policy measures. Meanwhile, the anticipated improvements in foreign exchange flows and the resultant enhancement in business and investor sentiment are expected to reinforce the expected recovery in the period ahead.

Excessive market interest rates have begun to adjust downward and are expected to ease further in the period ahead 

Early signs of a gradual easing of excessive market interest rates have been observed recently in response to the administrative measures adopted by the Central Bank, along with the improvements in domestic money market liquidity and overall sentiments in the domestic markets. Recent measures adopted by the Central Bank to reduce the overreliance of licensed commercial banks on the standing facilities of the Central Bank and the concurrent conduct of open market operations helped improve liquidity in the domestic money market. This prompted activity in the interbank money market. Improved liquidity conditions, along with improved investor sentiment on the anticipation of “financing assurances” from official creditors, led to a notable moderation in the yields on government securities recently, reflecting the easing of the high risk premia attached to government securities. Meanwhile, the market deposit rates have also shown a notable moderation, benefiting from improved liquidity conditions. These developments are expected to pave the way for an easing of excessive market interest rates in the period ahead. Nevertheless, outstanding credit extended to the private sector by commercial banks continued to contract in response to the tight monetary conditions and the moderation in economic activity. Monetary expansion also moderated from peak levels, albeit at a slower pace.

The external sector remains resilient despite heightened challenges, and the outlook remains positive with the expected improvements in relation to “financing assurances” from creditors 

The merchandise trade deficit is estimated to have contracted significantly in 2022, compared to recent years, owing to an improvement in export earnings and a substantial compression of  import expenditure on account of policy measures taken to curtail non urgent imports and foreign exchange liquidity constraints. The gradual improvement in workers’ remittances, together with the revitalisation of tourism, helped improve the external current account balance in recent months while easing excessive pressures in the domestic foreign exchange market. As a result, the exchange rate has remained relatively stable, and recorded a marginal appreciation against the US dollar, thus far in 2023. Gross official reserves were estimated at US dollars 1.9 billion as of end 2022, including the swap facility from the People’s Bank of China, equivalent to around US dollars 1.4 billion. The envisaged finalisation of the IMF-EFF arrangement in the period ahead and the resultant developments that follow, along with the improvements in the external current account, are expected to enhance the external sector outlook.

Policy interest rates are maintained at current levels 

In consideration of the current and expected developments, both domestic and global, as indicated above, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 24 January 2023, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 14.50 per cent and 15.50 per cent, respectively. The Board was of the view that the current monetary policy stance is appropriate to ensure that underlying monetary conditions in the economy remain sufficiently contained to drive inflation along the envisaged disinflation path. While some downward adjustment in market interest rates has been observed lately, the Monetary Board is of the view that there is sufficient space for excessive market interest rates, including lending interest rates to Small and Medium Sized Enterprises (SMEs), to adjust downwards considering the recent improvements in domestic money market conditions and sentiments along with the moderation in the yields on government securities. However, the Board was also of the view that the anticipated further decline in the yields on government securities due to the narrowing of risk premia is unlikely to result in a significant improvement in underlying monetary conditions. The Central Bank will continue to closely monitor monetary conditions in the period ahead and will remain prepared to take swift and proactive measures, as appropriate.

Sri Lanka: Sovereign Insolvency

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The sovereign default announced by Sri Lanka on 12 April 2022, was the cumulative result of fiscal folly over many years. This writer has attempted to uncover the root causes of our ‘sovereign predicament’ in a series of interviews with international media between January and July 2022; a curated version of which could be accessed online1.

Two in-depth studies by this writer published in 20162 and 20173 prognosticated what was clearly a looming disaster. These were published in academic journals in 2016 and 2017, they were orally presented at the Inaugural Nagalingam Balakrishnan Memorial Lecture4 in Colombo on 21 June 2014, and at an international conference organised by the Centre for Poverty Analysis5 (CEPA) in Colombo from 1 to 3 September 2014, respectively.

The purpose of this essay is to highlight the specific blunders by successive Governors of the Central Bank of Sri Lanka and members of the Monetary Board since 2006 that has led to the current crisis, and hold them accountable for their actions and/or inactions over a period of 16 years (July 2006-April 2022). Authority and power come with accountability and responsibility. 

A couple of retired senior Central Bank staff (retired Deputy Governor of CBSL Dr. W.A. Wijewardena6, and retired Director of Statistics at CBSL Dr. S.S. Colombage7), independent Economists, and many other professionals (for example, Sanjeewa Jayaweera8) have repeatedly and publicly forewarned the Central Bank and the Treasury of Sri Lanka about their risky and wrongful policies since 2006 (if not before). Yet, successive Governors and Monetary Boards have not heeded saner counsel. 

This study offers citations/references that amply demonstrate where the fault lines were and who was directly or indirectly responsible for patently risky and wrong policy decisions. 

Global best practices in central banking in brief 

The independence of the Central Bank is a foundational imperative in an open market-led economic/monetary system. As a corollary, there must be a strict separation of powers between the Treasury/Ministry of Finance and the Central Bank of a country. This demarcation is as important as the insulation of the judiciary from the executive and the legislature. 

Countdown to sovereign bankruptcy in Sri Lanka

The very first breach of the independence of the Central Bank and its autonomy viz the Treasury occurred in the late-1990s when Sri Lanka graduated in to the lower middle-income country in 1997 and thereby gained access to borrowings in the private international capital markets. The Secretary to the Treasury was made an ex-officio member of the Monetary Board of the CBSL by the then President of Sri Lanka Chandrika Kumaratunga. A.S. Jayawardane was the then Governor of the Central Bank of Sri Lanka.

Although Sri Lanka was eligible to borrow from the private international capital markets in 1997, the very first such borrowing was in 2007 through the issuance of an International Sovereign Bond (ISB) to the value of $ 500 million. The then Opposition Leader and current President of Sri Lanka, Ranil Wickremesinghe9, wrote to the joint lead managers of the debut float (Barclays Capital, HSBC, & J.P. Morgan) in 2007 that a future government of his would dishonour repayment of the same.

After the election of Mahinda Rajapaksa as President in November 2005, Ajith Nivard Cabraal was appointed as the Governor of the Central Bank in July 2006. It has been the practice to appoint the senior-most Assistant/Deputy Governor to the post of Governor of the Central Bank since its inception in 1950 until President Premadasa appointed Dissanayaka as the Governor in 1992. Dissanayaka was a civil servant in the Ceylon Administrative Service (and its successor Sri Lanka Administrative Service) and was a Deputy Secretary to the Treasury prior to his appointment as the Governor of the Central Bank in 1992.

For the first time in the history of the CBSL a versatile book keeper assumed the role of Governor of the Central Bank in 2006. This appointment of a person who had scant regard for demonstrated and proven principles of central banking put the integrity of the Central Bank in peril. 

The decline of the technical competence and integrity of this premier institution was apparent to all but the ruling crony class. 

This writer learnt that there were deliberate actions taken by the newly appointed Governor to weaken the technical competence and integrity of the Central Bank by way of side-lining senior competent professional staff such as the then Head of Economic Research, Dr. H.N. Thenuwara, and the then Head of Statistics, Dr. Anila Dias Bandaranaike, among others. Such arbitrary, irrational acts of the new Governor resulted in the premature retirement/departure of Dr. H.N. Thenuwara, Dr. Anila Dias Bandaranaike, Rose Cooray, and the like from the Central Bank. Governor Cabraal wanted a compliant and subservient staff and a pliant Monetary Board as opposed to technically competent and upright senior staff with professional and personal integrity.

The year 2006 marked the beginning of severe politicisation of the CBSL never seen before in the history of the Central Bank since its establishment in 1950. It was not just the beginning of the politicisation of the Central Bank, it was also the beginning of the politicisation of the entire banking and financial sector including the private banks. The modus operandi of such politicisation was as follows. The CBSL under Cabraal utilised the EPF/ETF funds to purchase shares in the two largest private commercial banks. Commercial Bank of Ceylon (Com Bank) and the Hatton National Bank (HNB), and thereby secured memberships in the Board of Directors of such banks to park the retiring senior Central Bank officials such as Assistant/Deputy Governors. For example, Dr. Ranee Jayamaha (former Deputy Governor of CBSL) was appointed to the Board of Directors of the Hatton National Bank, and Dheerasinghe (former Deputy Governor of CBSL) was appointed to the Board of Directors of the Commercial Bank of Ceylon after their respective retirement from the CBSL. The foregoing appointments could have caused conflicts of interest (if not illegal). The justices of courts of law are barred from practicing law after retirement in order to prevent conflict of interest during their tenure as judges. In a similar vein, senior executive staff of a Central Bank should also be barred from working in the financial sector post retirement. 

The aforementioned appointments in the largest private commercial banks were made to influence/encourage those banks to borrow foreign exchange from private international capital markets to lend to the Government for its ambitious prestige infrastructure projects, inter alia, for what former Central Bank Governor W.D. Lakshman called the “developmental state”. (See the justification for such politicisation of the entire banking and financial sector by Dr. Weligamage Don Lakshman, one of the successors to Governor Ajith Cabraal (July 2006-January 2015) and the predecessor to Governor Ajith Cabraal (October 2021-April 2022), in 2020. Lakshman, 202010

Similarly, the CBSL under Ajith Cabraal directed state-owned commercial banks such as the People’s Bank and the Bank of Ceylon (BoC), and the state-owned specialised bank, National Savings Bank (NSB), to borrow foreign exchange from private international capital markets to lend to the Government for its ambitious prestige infrastructure projects as well as to fund capital expenditures of the state-owned public utilities such as the Ceylon Electricity Board (CEB) and the National Water Supply and Drainage Board (NWSDB), a state-owned enterprise such as the SriLankan Airlines, and crude oil purchases of the state-owned Ceylon Petroleum Corporation (CPC). (See, Sarvananthan, 201411, for example) 

Such Central Bank-directed external borrowings by state-owned banks, private commercial banks, and state-owned utilities/enterprises between 2006 and 2014, inter alia, have undermined the overall financial sector stability, increased the precarity/vulnerability of such semi-government and private financial enterprises, and contributed to the overall volatility of the external public debt portfolio of the country by way of underestimating the real total external liabilities of the Government. 

Policy milieu of the CBSL during 2006-2022

The Government’s direct borrowings through the issuance of International Sovereign Bonds (ISBs) and indirect borrowings through state-owned banks (such as syndicated loans) and utilities/enterprises (with and without government guarantee) currently account for over 50% of the total external debt of Sri Lanka. The borrowings by the state-owned banks and utilities/enterprises on explicit government guarantee are called “contingent liabilities”12 of the government in fiscal parlance. 

The ISBs bear the highest interest rates (between 5% and 9% in the international borrowings of Sri Lanka (see, for example, CBSL, 201213) among all the available external borrowing mechanisms (bilateral, multilateral, and private international capital market borrowings) to any country. Moreover, the repayments of ISBs are relatively short-term (5-10 years) without any grace period for the commencement of repayments. However, one advantage of ISBs is that borrower has to pay only the interest payment annually, and the entire capital is repayable only at maturity, which gives some breathing space for the borrower.

Between 2007 and 2019, borrowings in the private international capital markets were the primary mode of external borrowings for successive governments of Sri Lanka, in which borrowings do not require justification or do not come with strings attached (conditional upon economic policy reforms or political governance reforms). 

Ironically, certain press releases of the CBSL during 2007-2008 explicitly acknowledged that the proceeds of the ISBs were not only utilised to pay for certain infrastructure projects (such as the Hambantota port and southern highway) but also to retire some of the then-existing domestic debt that bore very high-interest rates (between 15% and 20% or higher) (see a series of articles by this author in Montage14 (current affairs magazine) edited by Frederica Janz at that time for criticisms of such external borrowings of the government/CBSL (unfortunately, we could not access the press releases of the CBSL before 2012 on their website now). 

In order to lessen the burden of short-term repayments of the ISBs, inter alia, successive Governors of the Central Bank have artificially kept the exchange rates quite stable thereby artificially overvaluing the domestic currency, the Sri Lankan rupee (LKR). This was the key policy blunder that led to the eventual sovereign default of the country in April-May 2022. The Central Bank’s frequent interventions in the foreign exchange market to prop up the rupee also contributed to heightened imports of consumption goods (including luxury motor vehicles, for example), especially during the period 2010-2019.

By keeping the value of the rupee artificially high by fixing the exchange rate/s for prolonged periods of time (years, not weeks or months) through frequent interventions in the foreign exchange market by the Central Bank, Sri Lanka’s exports were artificially overvalued (thereby undermining global competitiveness) in dollar terms, and earnings from tourism were suppressed. These were on top of the loss of the GSP+ facility for exports of goods and services to the European Union (EU) in the early 2010s. However, the GSP facility for Sri Lanka was restored in 2017 but is currently once again under intense review by the EU for the past couple of years. 

The severe negative impact of the managed floating exchange rate system practiced by the CBSL (as opposed to free float) is reflected in the fact that the exports of goods and services as a percentage of the GDP in Sri Lanka, in US dollar terms, that was 39% in 2000 and 32% in 2005 fell to mere 17% in 2021 (second lowest since 1960 after just 15% in 2020 due to the pandemic)15. 

Were the forgoing of exports and tourism earnings for white-elephant infrastructure projects and retiring of domestic debt rational and prudent management of the external finances of a country? To the best of the knowledge of this author, no sane government in any country would dare to borrow externally in the private international capital markets to retire its domestic debt in spite of the fact that domestic debt directly contributes to inflation. 

In addition to the folly of wanton borrowings through ISBs, the then Central Bank Governor Cabraal, and the then members of the Monetary Board (all political appointees) were singularly responsible for the losses incurred on hedging for crude oil imports16 and investments in ill-fated Greek Bonds17. The then Governor and the members of the Monetary Board have never been made accountable, to date, for such losses to the country. These past impunities have contributed to continued irrational and imprudent policy decisions of the Monetary Board (all political appointees), the chairperson of which is the Governor, that eventually resulted in the sovereign default in April-May 2022. 

By the time the Rajapaksa regime lost power in January 2015, Sri Lanka’s external debt position had already become precarious. The person who replaced Cabraal as the Governor of the CBSL in early 2015, Arjuna Mahendran, was once again from the international private sector though much more educated than Cabraal. However, Arjuna Mahendran also lacked professional and personal integrity like Cabraal, which resulted in the Central Bank of Sri Lanka bond scandal18. Arjuna Mahendran was removed from office in 2016 by the then President, Maithripala Sirisena, and replaced by Dr. Indrajit Coomaraswamy on 2 July 2016. Dr. Coomaraswamy possessed both educational qualifications and professional cum personal integrity to be the Governor of the Central Bank.

Whatever external borrowings made by the Government between 2015 and 2019 were almost entirely to make repayments of the external borrowings, especially ISBs, made during the period 2007 and 2014. The new President elected in November 2019 appointed “Emeritus Professor” W.D. Lakshman as the 15th Governor of the Central Bank effective from 24 December 2019. In spite of being a former “Professor of Economics” at the University of Colombo, Dr. Lakshman lacked the necessary exposure to the complex world of global commerce and the finer intricacies of international finance. 

Dr. Lakshman was an ideologue of a forgotten era. He was a lifelong critic of international financial institutions such as the IMF. Unsuitable to head the Central Bank of an emerging lower-middle-income open economy. Dr. Lakshman was the third worst Governor, after Ajith Nivard Cabraal and Arjuna Mahendran, the Central Bank of Ceylon/Sri Lanka has had in its entire history, though the former is professionally an honest person as opposed to the latter two. Dr. Lakshman’s lifelong pathological aversion to the International Monetary Fund (IMF) played a critical role in Sri Lanka’s procrastination to seek an IMF bailout.

By the time Dr. Lakshman was appointed the Governor in the closing days of 2019, Sri Lanka was shut out of the private international capital markets because of the repeated negative reports about the precarity of Sri Lanka’s sovereign bonds by global credit rating agencies such as the Fitch Group, Moody’s, and Standard & Poor (S&P) Global Ratings. Therefore, since the beginning of 2020, the CBSL was forced to borrow only locally in addition to several ad-hoc short-term currency swaps with Bangladesh, China, and India, a few bilateral credit lines from China and India, and one-off loans from Japan and South Korea. 

Money printing and Modern Monetary Theory (MMT)

Ironically, whereas a Central Bank’s role is to be a lender of ‘last resort’ to the government, under the governorship of Dr. Lakshman the CBSL became the lender of ‘first resort’ to the government by buying unprecedented levels of government securities, which literally meant printing money. 

While the dogmatic/theoretical inspiration for printing unlimited money is drawn from the fallacious Modern Monetary Theory (MMT), the practical lessons Dr. Lakshman19 cites are from Japan and the Newly Industrialised Countries (NICs) such as South Korea and Taiwan in the aftermath of the World War II, which he dub as “developmental states”. 

Dr. Lakshman, during his academic days, has publicly accepted corruption as a necessary evil during any country’s early stages of “take-off”, citing rampant corruption in Korea and Taiwan during their take-off period. I remember him juxtaposing corruption and successful developmental states as a classic chicken and egg conundrum at a public seminar held at the Dr. N.M. Perera Centre in Colombo several years ago, in which this author was a co-panellist. 

It is true that Japan, Korea, and Taiwan were developmental states (as opposed to market-driven states) during the early stages of their “take-off”. However, the global political and economic context during the immediate and medium-term post-World War II (i.e. 1950s, 1960s, & 1970s) period wherein victorious western powers regarded the aforesaid countries as bulwarks against communism raging throughout East and South East Asia did play a pivotal role for the resurgence of Japan as an economic powerhouse and the emergence of the so-called tiger economies (ala Korea and Taiwan). 

Hence, just because Korea and Taiwan were “developmental states”, Sri Lanka, for example, cannot emulate those “economic miracles”, through a developmental state. This author would argue that third world countries like Sri Lanka need what Prof. Rainer Kattel, et al, calls “entrepreneurial state”20. 

Two underlying cardinal principles of MMT are that as long as the public debt is denominated in domestic currency, a government need not worry about unlimited domestic borrowings because domestic currency could always be printed thereby avoiding a public debt default (i.e. states have “monetary sovereignty”), and that unlimited money printing ‘does not’ cause inflation! Both are fallacious according to mainstream economic science in general, and monetary theory in particular. (See, for example, Coats, 201921; Drumetz and Pfister, 202122; Hartley, 202223; Palley, 202024; Prinz and Beck, 202125)

In his oration to mark the 70th anniversary of the establishment of the Central Bank of Ceylon/Sri Lanka on 28 August 2020, Governor W.D. Lakshman promotes the idea of developmental central banking, deviating from the core functions/objectives laid out in the Monetary Law Act of 1949 and amendments thereof made in 2002. Implicit in his 70th anniversary oration was the justification for unlimited printing of money. Dr. Lakshman has been strenuously denying publicly that the printing of money causes inflation. One of Dr. Lakshman’s former students at the University of Peradeniya and later a lecturer in political economy in the same university (long retired), Sumanasiri Liyanage26, has publicly supported the printing of money by the Central Bank in January 2021.

Ajith Cabraal27, who once again functioned as the Governor of the CBSL between October 2021 and April 2022, propagated the myth in April 2021 that money printing does not cause inflation parroting the then Governor Lakshman. During the previous stint of Governor Cabral (at the CBSL) between 2006 and 2014, Dr. Lakshman was an “Adviser” at the Ministry of Finance. Cabraal had a history of shouting/shooting down negative reports by international credit rating agencies28 on Sri Lanka’s creditworthiness since 2006 to date. 

The over-stock of money in the market (as a result of money printing by the central banks worldwide), in the absence of a commensurate rise in production (primarily due to lack of demand), depreciates the domestic currencies resulting in hyper-inflation29 (including food inflation). In Sri Lanka, in the 21-month period between 1 January 2020, and 30 September 2021 (during Governor Lakshman’s tenure), due to excessive money printing30 by the Central Bank, the stock of money rose by 38% (i.e. by Rs. 2.9 trillion) whilst the GDP grew only by just 1%. This has caused inflation to rise to over 11%, and food inflation rose to over 18% in November 2021. 

These have seen steady rises ever since; resulting in the overall inflation, in terms of Sri Lanka Consumer Price Index (SLCPI), at its peak 74% in September 2022, and the food inflation at its peak 86% in September 2022. During the last quarter of 2022, however, both the overall inflation as well as the food inflation have begun to decelerate. 

Both Cabraal and Lakshman have unrepentantly deviated from the holy grail of central banking31, i.e. policy-making in the interest of the “public” as opposed to policy-making in the interest of the government in power or the politicians. 

The poor performance of Dr. Lakshman as Governor of the Central Bank is emblematic of poor standard of economic professors in Sri Lanka in particular, and poor pedigree and pedagogical practices of Sri Lankan academics in general. The tertiary level economic curriculum in Sri Lanka requires urgent and substantial revision and upgrading from outdated and irrelevant contents.

Theories of physical sciences are not subject to political or social circumstances, contexts, situations, or territories; that is, the outcomes of physical sciences theories are universal. In contrast, the outcomes of macroeconomic policies/theories vary according to the political and social circumstances, contexts, situations, and territories. Thus, right macroeconomic policies should be adopted taking into consideration of the individual political and social circumstances, contexts, situations, and territories. Just because advanced industrial countries were printing unlimited money for prolonged periods during the pandemic, any developing country cannot afford to print unlimited money for an indefinite period of time to revive its pandemic-affected economy. 

Lessons to be learned from sovereign bankruptcy in Sri Lanka

It is high-time the proposed new Monetary Law Act (MLA) in Sri Lanka explicitly and clearly define the qualifications and experiences required for the post of Governor of the Central Bank, members of the Monetary Board, and the members of the Stakeholder Engagement Committee (SEC). The SEC was established in July 2022 amalgamating the former Monetary Policy Consultative Committee (MPCC) and the Financial System Stability Consultative Committee (FSSCC). Moreover, the post of Governor and memberships in the Monetary Board and the Stakeholder Engagement Committee should be openly advertised and recruited and ‘not’ arbitrarily appointed by the President and/or the Governor (in the case of appointments to the Monetary Board & SEC).

While the independence of the Central Bank is sine qua non, there should be necessary checks and balances to prevent abuse of power, corruption, nepotism, and the like in the Central Bank of Sri Lanka in recruitment of staff, consultants, etc., and transparency in the policy-making and decision-making processes. Moreover, Central Bank’s frequent paternalistic diktats to the commercial and specialised banks (including to the private ones, let alone the state-owned banks) and unnecessary interferences in the financial sector in general (under the euphemism of “moral suasion”32) should be tamed (if not done away with) in the proposed new Monetary Law Act (MLA). Every single public authority (e.g., Central Bank Governor, Treasury Secretary, Monetary Board) in Sri Lanka should be made accountable and responsible not only to the parliament, government, and the executive in power, but more so to the general public as well. 

Sri Lanka cannot emerge out the current economic quagmire without broader financial sector reforms such as divestiture of the state-owned commercial banks (People’s Bank and Bank of Ceylon) and specialised banks (National Savings Bank) which function as captive sources for funding public debt (both domestic and external) as well as funding perennially loss-making state-owned utilities (Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC), National Water Supply and Drainage Board (NWSDB)) and enterprises (SriLankan Airlines, Sri Lanka Railways, Sri Lanka Transport Board, Road Development Authority, etc.). 

According to a report of the Committee on Public Enterprises (COPE) of the parliament of Sri Lanka, state-owned banks (i.e. Bank of Ceylon and People’s Bank) have complained that they have been repeatedly ordered by the Central Bank to fund the CPC and CEB during 2020-2022. Moreover, in the investigations into the Central Bank of Sri Lanka bond scam of 2015, it was revealed how the CBSL coerced the People’s Bank to back off from bidding. The forensic audit report of the CBSL in the aftermath of the bond scam of 2015 is yet to be made public. This kind of non-transparency cannot assuage the domestic markets or potential foreign investors. 

The state-owned banks have also become primary lenders to unscrupulous politicians from all political parties, especially members of parliament and deputy/ministers, who are involved in variety of businesses such as owning liquor shops and fuel stations throughout the country, and involved in construction projects (public works) for public and quasi-public authorities.

We understand that one of the conditions the IMF has put forward for its proposed bailout of Sri Lanka is enaction of a strong anticorruption legislation in parliament. This is just a cosmetic exercise. There are enough laws in Sri Lanka already to arrest corruption; what is lacking is the political and/or administrative WILL to enforce such laws or the law/s are applied only selectively to penalise the political opposition. 

In addition to any new legislation, the IMF should insist that an international forensic audit of the personal finances (bank accounts, movable and immovable property, income tax filings, etc.) of each and every member of parliament (including both government and opposition) and their extended family members, and each and every public servant (especially executive grade) (including armed forces personnel) and their extended family members should be carried out and appropriate legal actions taken if their wealth and income cannot be accounted for or justified.

Even today, under a new Governor and management, some of the actions of the Central Bank of Sri Lanka smack of duplicity and double standards in law enforcement as reflected in the recent permanent “revocation” of the license of the Prasanna_Money_Exchange_Pvt_Ltd33 and merely a temporary “extension of the suspension” of the trading of Perpetual Treasuries Limited34, which was the executor of the Central Bank bond scam of 2015. It is important to note here that the Perpetual Treasuries is owned by the son-in-law of the then (2015) Governor of the Central Bank, Arjuna Mahendran.  

If Angola35, where the Supreme Court in December 2022 ordered the seizure of $ 1 billion worth of assets of the daughter of the former President and freedom fighter Jose Eduardo dos Santos, and Mozambique36, where the Maputo City Court in November 2022 found a son of the former President and 18 other “high profile defendents” guilty of $ 2 billion illicit foreign loan with government guarantee that bankrupted the country could do it, why not Sri Lanka?

Although, in principle, we welcome the public appeal by 182 Economists worldwide37 on 8 January 2023, urging the hedge fund holders of International Sovereign Bonds (ISBs) of Sri Lanka in particular, and of all the third world countries in default in general, to cancel such debt, in practice any such debt cancellation initiative should be conditional upon barring all those politicians, bureaucrats, and professionals who were responsible for the sovereign default (by their actions or inactions) and who were directly or indirectly involved in the Central Bank bond scam and other mega corruption from holding any public office hereafter. If not, any unconditional and unilateral debt cancellations would become a moral hazard for countries such as Sri Lanka. 

Footnotes:

1https://docs.google.com/document/d/1LFQz1Wpqj68_MFVp6tGSRtx7liFBr8H-DFze-1WfLzo/edit.)

2https://link.springer.com/article/10.1007/s10708-015-9637-3

3https://journals.sagepub.com/doi/10.1177/0169796X17735241

4https://docs.google.com/document/d/1Bd9VMNMfAZZEYfiyfP4v6jf8XelKSA0z/edit

5https://www.cepa.lk/events/annual-poverty-symposium/13th-cepa-symposium-post-war-development-in-asia-and-africa/

6https://www.ft.lk/w-a-wijewardena-columns/A-Child-s-Guide-to-Modern-Monetary-Theory-Keynesianism-in-an-old-bottle/885-710459

7https://www.ft.lk/columns/Money-printing-to-repay-Govt-debt-worshipping-MMT-is-likely-to-magnify-economic-instability/4-710612

8https://island.lk/sri-lankas-economic-quagmire-and-how-margret-thatcher-smashed-the-keynesian-consensus/

9https://www.colombotelegraph.com/index.php/wikileaks-bond-issue-2007-unp-will-not-be-able-to-honour-repayment-ranil-wrote-to-jp-morgan-barclays-hsbc/

10https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/speech_20200828_70th_anniversary_oration.pdf

11https://docs.google.com/document/d/1jSY81CmYvMwQSJ-_z9J5OXyFXuTax9ZWPU5nPZyUMY8/edit

12https://www.imf.org/external/pubs/ft/fandd/1999/03/polackov.htm#:~:text=Contingent%20explicit%20liabilities%20are%20legal%20obligations%20for%20governments,on%20future%20government%20finances%2C%20and%20complicate%20fiscal%20analysis.

13https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20120717_democratic_socialist_republic_of_sri_lanka_us%24_1_billion_international_sovereign_bond_issue_e.pdf

14https://docs.google.com/document/d/1vCuAxDR7JGBB6pMD7EuDQ-8ppoChlPeBAvjftytSxsQ/edit

15https://data.worldbank.org/indicator/NE.EXP.GNFS.ZS?locations=LK

16https://www.reuters.com/article/srilanka-oil-hedging-idUSL3E8M25SI20121102

17https://www.sundaytimes.lk/120708/news/cabraals-gamble-lanka-loses-billions-in-bankrupt-greece-5565.html

18https://en.wikipedia.org/wiki/Central_Bank_of_Sri_Lanka_bond_scandal

19https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/speech_20200828_70th_anniversary_oration.pdf

20https://iris.ucl.ac.uk/iris/publication/1981807/7

21https://www.cato.org/sites/cato.org/files/2019-09/cj-v39n3-4.pdf

22https://www.intereconomics.eu/pdf-download/year/2021/number/6/article/modern-monetary-theory-a-wrong-compass-for-decision-making.html

23https://www.nationalaffairs.com/publications/detail/the-weakness-of-modern-monetary-theory

24https://www.elgaronline.com/view/journals/roke/8-4/roke.2020.04.02.xml

25https://link.springer.com/article/10.1007/s11293-021-09713-6

26https://www.ft.lk/Columnists/MMT-What-s-wrong-with-printing-money/42-711087

27https://island.lk/cabraal-no-relationship-between-money-printing-and-rupee-depreciation/

28https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20210112_unwarranted_rating_action_by_S%26P_e.pdf

29https://www.economist.com/finance-and-economics/is-the-world-economy-going-back-to-the-1970s/21805260

30https://www.ft.lk/columns/Budget-2022-What-s-the-missing-link/4-726282

31https://www.bis.org/publ/othp04.pdf

32https://www.jstor.org/stable/134345

33https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/Press_20221212_Revocation_of_the_money_changing_permit_issued_to_Prasanna_Money_Exchange_Pvt_Ltd_e.pdf

34https://www.cbsl.gov.lk/en/node/13817

35https://www.aljazeera.com/news/2022/12/28/angolan-court-orders-seizure-of-dos-santoss-assets-lusa-news-agency

36https://www.aljazeera.com/news/2022/11/30/mozambique-court-hands-out-verdicts-in-2bn-corruption-case

37https://www.theguardian.com/business/2023/jan/08/hedge-funds-holding-up-vital-debt-relief-for-crisis-hit-sri-lanka-warn-economists

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