Due process matters

 The Government asserting itself to minimise the economic impact of COVID-19 is a positive development, but it has to do so carefully and not create more issues through its ad hoc interventions. Most importantly it should not undermine the independence of institutions, particularly the Central Bank. The financial system is a delicate thing and changing it haphazardly or encouraging intervention outside of due process can have serious and unforeseen consequences. 

Prime Minister Mahinda Rajapaksa recently agreed to appoint a commission to probe alleged irregularities in State banks committed during the previous Government, in response to a request by the Ceylon Banking Workers’ Association. This comes on top of other recommendations made by President Gotabaya Rajapaksa, which includes establishing a committee to monitor progress in settling dues of troubled finance companies that have had their licenses cancelled, and, perhaps most worryingly, taking over assets of these companies without litigation to settle dues. 

The Central Bank earlier this month slashed its Statutory Reserve Ratios (SRR) to just 2%, which resulted in bank liquidity increasing by an estimated Rs. 200 billion, but with subdued demand in the market much of these funds have likely been parked in the SDFR facility provided by the Central Bank at 5.50% interest, rather than allocated for lending. Therefore the Central Bank will likely institute another rate cut in July to reduce this incentive, and push banks to increase lending as well as roll out a guarantee system, which was the larger need to improve credibility of borrowers.   

Public banks make up an important part of the financial system and their proper function is crucial to the health of the entire economy. This is why the Central Bank is responsible for vetting key appointees and ensuring their function remains efficient. The Central Bank already exists as the regulator of all licensed banks in the country. Political appointments are certainly an issue in Sri Lanka, but successive governments have been guilty of this, including the present one, and appointing multiple commissions have increased the confusion and eroded public confidence rather than achieving the opposite. 

If there are serious concerns, then these should be appropriately addressed by the mechanisms already in place. Appointing commissions, largely because elections are around the corner, may not necessarily have the transparency and accountability goals that would best serve these institutions, and by extension the public. This is in no way to say the wrongdoers should be given a free pass, but rather depoliticise the response and allow due process to proceed unhindered. 

The Government should also not confuse its policies. On one hand it insists Sri Lanka is ready to do business with investors, but on the other calls for assets to be taken over outside of the judicial process. This is not wise, especially since during Prime Minister Mahinda Rajapaksa’s second term, a controversial appropriation legislation was rolled out by Parliament with clear political overtones. Therefore, it is better to address bottlenecks in the court system through judicial reforms, rather than Executive interventions. 

The President cannot say he wants to establish a Parliament that respects the Constitution on Twitter but act contrary to this stance in reality. Sri Lanka has insolvency and bankruptcy laws, it has institutions that should be empowered to continue acting independently, and it is crucial that due process is followed in economic and other matters, or the repercussions could be serious for an already delicately-poised recovery process.