Can your conscience be reconciled if an avoidable economic calamity strikes SL?

Following is an open letter sent by Chandra Jayaratne to intellectuals, professionals, academics and business leaders, posing a query on whether their conscience could be reconciled if an avoidable economic calamity were to strike Sri Lanka – especially if such a catastrophe was avoidable by intellectual debate, early warning, and collective risk mitigation action initiatives:

30 April 2011

An Open Letter to the;

    Chairman, Social Scientists Association,

    Chairman, Ceylon Chamber of Commerce,

    President, Sri Lanka Economic Association,

    Executive Director Transparency International Sri Lanka,

    President, Institute of Chartered Accountants of Sri Lanka,

    President, Chartered Financial Analysts Association,

    Chairman, Bankers Association of Sri Lanka,

    President, Bar Association of Sri Lanka,

    President, Organization of Professional Associations,

    Executive Director, Institute of Policy Studies,

Can your conscience be reconciled if an avoidable economic calamity strikes Sri Lanka?

Have you and your fellow executive committee members of the respective associations, institutes and chambers ever spent time reflecting on how you will reconcile your conscience as intellectuals, professionals, academics and business leaders, in the event Sri Lanka and its citizens are significantly impacted negatively in the future, following an economic and social calamity, especially if such catastrophe was avoidable by intellectual debate, early warning, and collective risk mitigation action initiatives?

Have you reflected on the recent economic and social calamities that negatively impacted common citizens of Iceland, USA, Greece, Portugal, and Spain etc? Following such a critique, have you asked the critical questions?

1.Can Sri Lankan citizens be similarly impacted in the future?

2.Are there signs or even amber lights indicating possible risks of similar future calamities?

3.Are there lessons for preventive action in Sri Lanka that you should surface in intellectual debates?

4.Should you critique further the valuable article in The Sunday Times recently contributed by Dr Nimal Sandaratne on the long term economic impact of the widening trade gap in Sri Lanka as well as several articles in the Daily FT on the financial and economic crisis in Greece, Portugal and Iceland?

5.Are there amber signals in the rapidly expanding level of foreign debt and its inappropriate profile despite the much publicised high foreign reserves?

6.Are there any risks threatening the stability and sustainability of the stock market?

7.Are the interests of depositors and investor adequately safeguarded?

8.Are the regulators/auditors/associated professionals independent, competent and committed to international best practices? Have they looked for lessons from the global economy and built in appropriate checks and balances locally?

9.Is there justification for the current exchange rate policy in line with local inflation and inflation in competing countries and can Sri Lanka sustain its export competitiveness in the longer term?

10.Are we satisfied with the executive commitment to fiscal responsibility?

11.Can the priority and allocation of scarce national resources by those in governance be justified and reconciled with the equitable priority needs of the nation and its citizens?

12.Can we be satisfied with the economy, efficiency and effectiveness of key infrastructure investments and other significant project spends and are there adequate controls and transparency to minimise opportunities for corruption and waste?

13.Can transparency and good governance be a reality when the right to information and whistleblower protection laws is not in our statute books?

14.Are there effective opportunities for advocacy, whistle blowing and public interest litigation?

15.Is the media, capable and free to play the role expected of them in society?

16.Are we free of policy capture corruption?

17.Is the legislature and the opposition in parliament playing the desired role as far as public spends are concerned? Are parliamentary committees including COPE and COPA serving their intended purposes? Are the reports presented in Parliament under the Fiscal responsibilities Act adequately reviewed and critiqued?

18.Are the public funds in trust with the managers of the Employees Provident Fund and Employees Trust Fund being invested solely for the benefit of the designated beneficiaries within acceptable codes of conduct and ethics?

19.Are the adoption of new bills, regulations and policy pronouncements preceded or followed up by open and transparent public critique? Are intellectuals in the public interest participating effectively in the process leading to these enactments?

20.Have the Monetary Board, Central Bank, Finance Commission, Bribery and Corruption Commission, Securities Exchange Commission, Telecommunications Regulatory Commission, etc., have delivered on independence and accountability expectations of society?

If you address the above questions, together with other key associated questions from a stand point leaning towards effective risk mitigation in preventing the crystallisation at a future date of avoidable economic and social calamity, the critical importance of open and transparent intellectual debate on many issues will surface as the primary responsibility of leaders of society, in the context of the operating external environment.

Such an independent critique will also surface the critical economic issues, topics and questions which are not widely reviewed and debated by the leaders in governance, business, academia, media and civil society, despite their relative importance in the short, medium and long term, in delivering sustainable economic growth and prosperity of Sri Lanka and its people. These issues include, but are not limited to the following;

1.Is the Colombo Stock Market a rising global market star or a bubble waiting to explode?

2.What long term impacts will there be with development investments and changing consumer behaviours driving to further enhancements in the trade gap?

3.Are there lessons for Sri Lanka from Greece and Iceland?

4.Can Sri Lanka experience a balance of payments and a debt crisis in the medium term?

5.Can the savings gap in the short to medium term be more effectively met out of FDI inflows and Public Private Partnership than out of debt financing?

6.Are there adequate legislative and public oversight, transparency assurance and control over large ticket public spends and investments? Will these investments yield adequate free cash flow returns sufficient to service loans and other commitments made to finance such investments?

7.Can scarce national resources allocation be better targeted and prioritised meeting equity and citizen needs?

8.The availability of IMF bailout package and bilateral loans from friendly nations positive in assuring good fiscal governance?

9.The trends in the REER (competiveness) and the inconsistency between the Government’s growth/investment targets and the current stance on exchange rate policy

10.Are foreign policy and foreign relations supportive of trade and investment growth?

11.Has Sri Lanka effectively exploited all opportunities under regional free trade and services agreements?

12.Are bilateral direct negotiated infrastructure investments and financing packages in the nation’s long term interest?

In the above context should you not give leadership by yourselves and along with selected network partners and be willing to lead an initiative to open a series of intellectual debates, preferably closed door Chatham House rule based, inviting selected leaders representing those in governance, business, academia, media and civil society, following which a series of policy/strategy papers will be developed for wider circulation and further public debate.

Before you make a decision on this appeal, I believe it is essential that you and your Executive Committee members spend time to view the Charles Ferguson directed award winning movie ‘Inside Job,’ described as “the film that cost over $ 20 trillion to make” and is built around the inside story on the financial crisis and economic recession, and vividly describes what happened in Iceland, USA, EU and the developed world before and after the crisis.

The film narrates clearly the risks and ills associated with unrestricted borrowings, financial deregulation, bank mergers, speculation, uncontrolled and unrestricted public issues raising money through stock and other financial markets, sub-prime loan portfolio growth, the opportunity for banks/investment banks/other financial power houses to make large profits at the expense of expected governance frameworks and regulations, forcing common citizens to freely borrow, especially where such acts go hand in hand with regulatory failures, conflicts of interest, executive greed and fraud/deceit by business leaders and leading academics.

The film clearly demonstrates the outcomes of such an environment leading to the downfall of many citizens, whose lives and livelihoods are destroyed. This environment led to the global recession, massive loss of jobs, destroying of public wealth, out of control key industries, and bubbles in share valuations and stock markets.

The role of unregulated and unprofessional credit swaps, derivatives and futures trading market mechanisms and the real accountability of credit rating agencies and auditors are brought in to focus in the film. The insurance schemes designed and in place that provided recompense for those who gambled, and put in place loss making deals to benefit those who structured these deals are also highlighted. This policy allowed the businesses with higher loses to benefit more and brings out how all hallowed principles governing risk transfer mechanisms were violated.

The film vividly present how bribery, fraud, tax evasion, money laundering, window dressing of accounts, misrepresentation of executive expense statements, were all a regular part of the governance practices in place. This was despite strong codes of governance and ethics being in vogue. The film articulates how this “ticking time bomb” was concealed for many years under the very noses of the reviews by the regulators, auditors, analysts, media, and audit committees.

The irony as highlighted is the fact that many of the corporate fraudsters and those persons who failed to act due to negligence, incompetence, conflicts of interest or due to lucrative contractual benefits in place, have all escaped criminal liability. Especially, the CEOs who should have carried the ultimate accountability have escaped and many of them have in fact received even unjustified compensation and severance payments.

The issues of critical importance to note from the film are the national and institutional impact of having failed to heed to the voices of dissent, the voices that highlighted dangers and risks. Failure to exercise the expected accountability even in the face such warnings by those in governance, shows how the public reliance on in built systems of transparency, due accountability and enforced risk mitigation action cannot always be relied upon in the interests of wider stakeholders of society.

The film clearly demonstrates the extreme importance of having real independent directors’ (i.e. those with capability, independence, commitment and unfailing integrity). The dangers of pseudo independent directors, serving as mere puppets of the executive team and major shareholders is highlighted in the film and there are important lessons for all listed entities in Sri Lanka, especially those in public deposit taking financial services industry.

The applicable qualifying rules, the processes of selection, election and re-election, binding governance framework and compensation packages of these independent directors certainly play a critical part in assuring good governance. This is an important area of concern in the local context,

The role played by consultants and high officials, who provide defensive answers concealing the truth, practices of self denial by those in governance, wearing blinkers whilst exercising accountability and even cover up practices are all evident in the run up to the financial collapse. These practices are by no means easy to eliminate. These risks cannot be eliminated merely by having systems and procedures. The judgment of their inherent qualities and value systems will provide better validation tips and surface potential risks.

The failures of corporate governance and failures of functioning audit, risk and remuneration committees have been highlighted in the film. When corruption and deceit on the part of associated independent professionals like auditors, academics, regulators and analysts are added to the institutional control system failures the operating environment is at severe risk of being exploited to the detriment of society.

Thus the film highlights again the utmost importance of independent directors, independent regulators and independent professionals and academic, all having the required capabilities, integrity and unwavering in commitment to international best practices and codes of conduct and ethics. In addition the men and women at the top of the governance structures in the executive, legislature, judiciary, business, academia and media must be of similar character and be committed to serve others before serving self.

All of the above issues as highlighted in the film provide a base to assess potential risks in the Sri Lankan economy and financial markets, to draw lessons for action and prepare a platform to develop strategic risk mitigation way forward action strategies.

I am copying this open letter to eminent persons in governance, who I believe will endorse fully the setting up by you of a platform for intellectual debate of economic and social issues of significant importance in moving Sri Lanka and citizens towards sustainable economic growth and prosperity.

Yours sincerely,

Chandra Jayaratne

    CC. Secretary to the President,

    Secretary, Ministries of Finance and Planning and Economic Development

    Secretary, Monetary Board,

    Deputy Governor, Central Bank,

    Auditor General,

    Attorney General,

    Chairperson, Securities Exchange Commission,

    Chairperson, Insurance Board of Sri Lanka,

    Editors of media – For publication please

    Country Director, International Monetary Fund,

    Country Director, World Bank,

    Country Director, Asian Development Bank