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Former Sri Lankan Finance Minister defends the Central Bank against the President’s ‘tantrum’

In an open letter to Mahinda Rajapaksa, Prime Minister, and current Finance Minister, Mangala Samaraweera, the former Finance Minister, defends the conduct of Sri Lanka’s Central Bank officials from what he describes as a “tantrum” from Sri Lanka’s President, Gotabaya Rajapaksa.

This follows a statement from the Sri Lankan President which condemned the central bank and demanding action within 24 hours. According to Gotabaya Rajapaksa, the Central Bank had failed to “put forward a single proposal to rebuild the economy” and this has forced the government to “take the blame for the economic slowdown”. The Central Bank responded by issuing new credit schemes and a reduction of the Statutory Reserve Ratio (SRR).

Samaraweera has defended the conduct of the Central Bank maintaining that the economic crisis Sri Lanka is facing is “fundamentally fiscal, not monetary” and has chastised the President for “slashing its revenue sources before the crisis” as well as for a “rapid deterioration in our foreign relations”.

He further chastised the President’s lack of experience and knowledge stating:

“The President’s accusations have no basis in fact. In fact, they suggest that he is unable to cope with the demands and strain of his great office. This comes as no great surprise considering that he has very little economic, political and policy-making experience”.

 

Foreign Relations

Samaraweera blames the Rajapaksa for damaging international relations and states that “goodwill was lost within months”. According to Samaraweera, the US Millennium Challenge Corporation (MCC) grant was suspended because the current administration “threw democracy and human rights in the dust-bin”.

This statement follows growing concerns over the continued suspension of parliament in Sri Lanka alongside the appointment of two Presidential Tasks Forces (PTF). The for the creation of a  “disciplined, virtuous and lawful society” has been described as a threat to the rule of law whereas the one established for the preservation of archaeological sites in the East as expanding upon previous Sinhalisation projects.

Samaraweera applauded the previous administration's record stating that they had:

“The largest grant in Sri Lankan history, worth $500 million, from the United States; GSP+ and fishing exports restored to the EU; Indian concessional finance and investments for airports and railways; a huge Chinese free trade zone in Hambantota and FDI into the Hambantota Port; a Free-Trade Agreement with Singapore; almost interest-free financing for the LRT from Japan”.

However, Samaraweera call to “ensure human rights, democracy, reconciliation and the rule of law” also follows threats to withdraw from the UN if they prosecute Sri Lankan soldiers for war crimes.

Earlier this year he also claimed that he saved Prime Minister Mahinda Rajapaksa from the “electric chair” and “saved” Sri Lankan soldiers from international prosecution, in an address to parliament.

He reportedly told Sri Lanka lawmakers:

“We said at the Geneva convention that we do not want foreigners to investigate on our country and that we can do our own investigations […] Through that we were able to divert international attention from the issue.”

Samaraweera has also previously criticised Rajapaksa, accusing him of branding Sri Lankan soldiers as “war criminals” and of making "secret deals" with the LTTE and the Tamil diaspora. He has also persistently claimed that his regime’s actions have saved Sri Lankan soldiers, “restored military honour” and halted international action.

 

The actions of the Central Bank

Commenting on the Central Bank, he maintains;

“[The] CBSL has done what was required of them in response to the crisis. They were quick to provide plenty of liquidity and to ensure the integrity of the payments and settlements systems during the worst of the crisis. They have been successful in bringing down interest rates and very quickly articulating the framework for moratoriums that provided breathing space to businesses for the next six months. In addition, they enabled refinancing schemes to provide working capital loans for SMEs at 4%. This was done whilst provide some cushion for the banking system by relaxing liquidity and capital thresholds”.

Samaraweera maintains that the role of the central bank is to “manage the supply and cost of money in order to achieve price stability”. The actions take to further ease the Statutory Reserve Requirement have further enabled greater liquidity in the system, but he states that this is not necessary. Instead, the issue is the country’s credit risk.

“The banks do not want to lend to businesses that have become high risk due to COVID because a default in such lending can directly lead to the loss of depositors’ savings. On the one hand, the CBSL is castigated for allowing finance companies to fail and on the other hand, they are being asked to push banks to lend to risky businesses setting banks up for failure as well”, Samaraweera writes.

He maintains that the Treasury could have provided a “partial guarantee of the loans provided by banks” however it lacks the funds to do so as the government decided “to slash one-third of treasury revenue in December last year by implementing drastic tax cuts”. He states that due to this failure there will be an "unprecedented" default on loans and there will be a need for international experts who have worked on sovereign defaults. 

Samaraweera further criticised these tax cuts stating:

“The tax cuts had no impact on prices and cost of living and now the treasury can barely pay salaries let alone provide funds for relief to SMEs”.

He also notes that Sri Lanka's Central Bank lost any "semblance of independence on 31st May". This was after the government demanded two of the five members of the Monetary Board resign. The board now has three members who were appointed by the President. 

Read his full statement here.