UNP criticism validated by S&P’s, says Harsha
MP and consultant economist Dr. Harsha De Silva yesterday alleged that THE UNP’s criticism over the mismanagement of the economy and the Central Bank as well as the EPF’s investments in banking stocks have been emphatically validated by global rating agency Standard and Poor’s.
“Standard and Poor’s reiterated what we have been saying for the last three years with the announcement it issued on Tuesday,” asserted Dr. De Silva, showing off S&P’s report via his tab at a press conference.
As reported yesterday in the Daily FT, Standard & Poor’s Ratings Services said it has assigned Sri Lanka to its Banking Industry Country Risk Assessment (BICRA) group ‘8’. At the same time, it assigned an economic risk score of ‘8’ and an industry risk score of ‘7’. “First off I want to say that S&P and I have no involvement, but S&P is now saying what we have been saying for so many years. For stating facts, we were called traitors; they issued releases every two days and were slinging mud at us,” he emphasised.
Noting that although some politicians and high officials in Government may not be experiencing the effects of the economic crisis, he said that the people were severely affected by it.
De Silva added that the UNP repeatedly highlighted the crisis, but its calls fell on deaf ears. “We asked the Petroleum Industries Minister why fuel prices couldn’t be reduced when global prices had dropped, but he pinned the blame on the falling rupee, which is true. Prices of all imported items have risen. Treasury bills a year ago were at 7% but have now gone up to over 12% – a 75% hike. As a result, interest rates have gone through the roof. SMEs are facing a situation where they cannot go to a bank for a loan.”
Commenting on inflation, he said: “The Government was saying that vegetable prices have dropped thanks to the ‘Divi Neguma’ program, but vegetable prices are sky-high. What has happened to ‘Divi Neguma’? Did it rot or fall apart? Did it go bankrupt? Or did the traitors destroy it? How did the prices rise? Consumer goods prices have risen sharply. This is all due to the steps being taken to artificially manipulate the macro economy.”
He added that today inflation has risen to 7% and the IMF has stated that by end 2012, it will reach at least 9.5% or go beyond. “This Government works according to the IMF’s conditions. The UNP is not so bankrupt as to suggest that the Government should not take the advice of the IMF, but the current situation brings to mind the saying that you cannot fool all the people all the time. The Government will soon have no choice but to admit that the management of the country’s economy has fallen apart.”
According to de Silva, it was in this background, given the Government’s politicisation of the Central Bank and the resulting monetary policy, that he repeatedly stated some of the investments being made in the stock market must not be made.
“I said it was in contravention of the Government’s own policy statement. However, a statement was issued on 6 June saying that all the transactions being carried out on the Stock Exchange were in accordance with internal guidelines and that the Opposition’s allegations were false and a concentrated attempt to destroy the economy. Several others and I were accused of trying to destroy the stability of the financial system.”
However, de Silva highlighted that S&P had noted that it sees potential conflict of interest in the Central Bank’s role. Quoting from the report, he said: “In addition to policy formulation and supervision of banks, the Monetary Board of the Central Bank also oversees the EPF investments. The fund is a large investor in Sri Lankan stocks… Our industry risk is based on our opinion that the country faces very high risk in its institutional framework.”
Referring to the S&P statement that it views banking regulation in Sri Lanka as being somewhat weaker than international standards, he also touched on its comments on governance and transparency of banks being comparatively weak, with the Central Bank and EPF transactions in the stock exchange being cited as examples. He said that when he revealed the NSB scandal, he was ignored, but finally the people had to agitate and the President had to halt the deal and send NSB Directors home.
Asserting that the Opposition would continue to challenge the Government in order to battle corruption, he said that economic stability was not being destroyed by the Opposition but by the Government’s wrong and unsuitable policies.
De Silva emphasised that this was the first time an international organisation of the calibre of S&P, the world’s most accepted rating agency, had pinpointed it: “We have been telling the IMF this on a number of occasions. But now the cat is out of the bag. S&P has very specifically stated that the EPF’s investments in the Colombo Stock Exchange with respect to certain types of stocks ought not to be done and there are conflicts of interest.”
Pointing out that the UNP was not so bankrupt as to tell the EPF not to invest in the stock market, he said he was not making such an irresponsible statement, but that when S&P says there are problems in regulation, transparency, governance and the institutional framework, it means confidence in Sri Lanka as a whole is falling.
“When you say investors are not coming, don’t shoot the messenger; you have to solve the problem. Attacking me will not bring in investors. They will have to fix the problems that the investors, rating agencies and multinational organisations are seeing. Unless they fix them, the story is not going to change. They also talk about the external imbalance. This is reality. If the Government is not going to accept reality today and the authorities say they don’t agree with these views or S&P is politically motivated or Harsha de Silva had something to do with this, it’s not going to solve the problem.”
De Silva stressed that taking loans would not solve the problem and that it was all dependent on economic fundamentals. “The economic vision needs to change. Otherwise, let alone becoming the ‘Miracle of Asia,’ we won’t be able to get even remotely close to that goal.”
Commenting on the use of the BICRA methodology, Dr. de Silva said that it was the first time it has been done and that BICRA was a very good methodology, widely accepted by all stakeholders.
He noted that BICRA looks at two things: conomic risk and industry risk. Economic risk is broken down into economic resilience, economic imbalances and credit risk in the economy. Then in the industry risk category, they look at institutional framework, competitive dynamics and system-wide funding.
“In Sri Lanka’s case, particularly institutional framework where banking regulation and supervision, regulatory track record and governance and transparency is concerned, we have scored very poorly. That has contributed to the total rating of a very high risk. We have been grouped together with Nigeria, Tunisia and Kazakhstan. I don’t know whether other rating agencies will follow suit, but this is a very strong statement and if they can’t see the writing on the wall now, we are headed for disaster.”
Dr. De Silva said he has been continually pointing out the governance issues in the banking system to the IMF and everyone else over the last two-and-a-half years. “I am disappointed that this time the IMF didn’t mention any of the governance issues in the financial system. In my view, they should have done that, because this money we get from the IMF has to be paid back by the people of this country. It is the IMF’s duty to mention it publicly so that everyone knows the truth. If they say there is no problem, transparency is perfectly okay, governance is fantastic, regulation could be better, then there is obviously a huge contradiction between that and what S&P has reported.”
Commenting on the balance of payments, he stressed that the IMF had to be happy. “Why wouldn’t it be happy? It imposed three conditions and the Government immediately conformed to the conditions – one was to float the exchange rate, two was to let go of the artificially low interest rates and three was to increase the prices of fuel and utilities. The Government has done all three so why shouldn’t the IMF be happy?”
Asserting that no one could beat economic theories, he said that if you understand economics, you know what is possible and what isn’t. “I have been saying all this as a person who understands economics, but the politicians have been calling me a traitor. Of course, the economists within the Government understand what we are saying.”
By Marianne David
FT