Intellectual debate needed on present external sector monetary management policies and practices

• Good governance activist Chandra Jayaratne writes open letter to Central Bank Governor 

Following is an open letter to Central Bank Governor Prof. W.D. Lakshman from good governance activist Chandra Jayaratne 

I write this open letter to you as longstanding colleague and a one-time member of the Financial System Stability Consultative Committee of the Central Bank.

I request that the Central Bank (CBSL) arranges a public participative intellectual debate, on a virtual platform, between the CBSL Team and invited economists, bankers and business managers with practical experience in business, consultancy and banking/finance, with the subject of the debate to be on the present external sector monetary management policies and practices.

I make this appeal as I fear that the public image of the CBSL and the independence, professionalism and intellectual integrity of yourself and the CBSL Team, may come in to question, if not now, in the near future or even in the long term.

The context in which I feel compelled to make this suggestion comes for the undernoted events, some of which were by initiated by external parties and some by you and the CBSL Team:

External party actions

(1). Sri Lanka’s sovereign rating downgrades by international rating agencies

(2). IMF reports on Sri Lanka’s Debt Sustainability

(3). The Credit alerts on Sri Lanka issued by Morgan Stanley, Citi Group, etc., and more recently by Barclays and Standard Chartered Bank

(4). Purported negative actions of some foreign commercial banks in the acceptance of letters of credit originating from Sri Lanka

(5). Negative sentiments expressed by potential investors and diplomats on the currently imposed import restrictions

(6). Amber risk signals emerging of possible re-classification of Sri Lanka in the Financial Action Task Force (FATF) identified jurisdictions with weak measures to combat money laundering and terrorist financing 

(7). Negative sentiments expressed by local business leaders on sudden imposition of restrictions, price controls and short time validity of gazettes and tariffs and associated policy inconsistencies

CBSL sanctioned action

(1). CBSL directive that every exporter of goods shall receive the export proceeds in Sri Lanka in respect of all goods exported within 180 days from the date of shipment and immediately upon the receipt of such export proceeds into Sri Lanka convert 25% from and out of the total of the said export proceeds received in Sri Lanka into Sri Lanka Rupees, through a licensed bank. 

(2). Commercial banks being restrained from entering in to forward contracts of foreign exchange, in order to avoid excess volatility in the foreign exchange markets and its impact on the CBSL’s risk management 

 (3). Restrictions on banks in declaring cash dividends, repatriation of profits, engaging in share buy backs, increasing management allowances and payments to the Board of Directors, whilst being compelled to exercise extreme due diligence and prudence when incurring capital expenditure

(4). Restrictions on outward remittances on capital transactions

(5). Severe import restrictions over an extended period

(6). The CBSL whilst maintaining that the increase in volatility of the exchange rate is unwarranted and unacceptable; committing among other measures to take appropriate action aggressively to contain such volatility in the domestic foreign exchange market and stating that it expects that these actions, together with the continuation of the curtailment of non-essential imports, will enable the Rupee to appreciate within a few days towards the levels of below Rs. 185 per US dollar as observed in November 2020. However, this CBSL commitment appears not possible to deliverable in the short or medium term

(7). Commercial banks being required to sell 10% of foreign worker remittances converted each day to the CBSL, (purportedly imposed post the Government following a two rupee to a dollar extra payment for worker remittances as announced in the last budget).

(8). Proposed scheme to promote Special Deposits and Investments to be made in Sri Lanka, out of new inward remittances, based on a state guarantee of free convertibility at any time, along with a reconversion option for repatriation at the fixed rate of conversion applied at the point of initial inward receipt.

(9). Purported relaxation of the FATF guidelines associated with applicable ‘Know Your Customer Rules’ and the relaxation of operational, regulatory and licensing systems connected with non-traditional businesses (e.g. In gem and jewellery exports/local trading)

(10). Fast tracked investments and deposits being promoted with offers of special taxation and regulatory exemptions and without the imposition of applicable source of funding validations 

(11). The lack of transparency and clarity on the operational, legal, regulatory and oversight control governing regime/framework applicable within the Port City related Financial Centre operations and its inter-linked transactional framework of governance in transacting with the island’s banking, finance and regulatory systems 

(12). Your assertion in January 2021 that the external sector is expected to remain resilient with the support of appropriate policy measures, amidst domestic and global challenges and that the Government expects to resolve Sri Lanka’s external debt management challenges on self-reliant basis, without a debt restructure or funding support from the International Monetary Fund.

It is the opinion of many economists, bankers and business managers with practical experience in business, consultancy and banking/finance professionals, who are committed to ensure equitable and sustainable long-term socio-economic growth and prosperity of all citizens the way forward charted by the CBSL is counter-productive, untenable and impractical on account of: 

(1). The new impositions shown in italics in 1, 2 and 6 above, which policies have not been seen since liberalisation and adoption of market based best practices aligned external sector governance regimes

(2). The announced continuing intentions of maintaining severe restrictions on imports 

(3). The unsuccessful attempts at maintaining a stable exchange rate as referred to in 6 above

(4). Re-entry in to a dual exchange rate system referred to in 7 above

(5). Financial Action Task Force guidelines based anti-money laundering and terrorism financing due diligence being relaxed – reference 9 and 10 above

(6). Unclear operational framework of the Port City Operations referred to in 11 above

(7). Your assertions in 12 above highlighted in bold letters 

They are in fact of the opinion that the way forward planned by CBSL will damage the investor confidence and downgrade further Sri Lanka as an attractive destination for trade, services and logistics support; and will lead to deterring new foreign direct investments, retard the growth of the export of goods and services sector; and could further seriously impact on the monetary and exchange rate stability; and further challenge the capability to honour external debt commitments; and may even lead to the vision of Prosperity and Growth of Sri Lanka by 2025 to become a lost dream. 

I trust, you being a very senior and highly respected academic with a mindset ready accept that the best solutions to challenges emerge from debates, critiques and willing to seek best out of the box available options, that you will accept the suggestion expressed at the commencement of this letter.