RW’s political rating and Fitch’s credit rating

President Ranil Wickremesinghe

With shortened and even total disappearance of human queues standing in hot sun or getting drenched in pouring rain, just to procure some cooking fuel or petrol and medicine or victuals, and with news of occasional price reduction on selected consumer items retailed through Sathosa, there is no doubt that the popularity of the man at the helm, President Ranil Wickremesinghe, is on the rise for the time being and among ordinary folks. That much must be admitted even by his worst critics.

For a man who led his political party UNP, to a historic defeat in 2020, in which the party lost all but one seat it contested, including his own, this little reversal in popularity should be more than a welcoming news. Not surprisingly therefore, his party is now reported to be on a mission to recruit suitable candidates and looking for alliances to contest the next election, whenever its leader sees fit to call for one. It all depends on how the 2023 Budget presented by him as Finance Minister is going to perform over the next 12 months. The positive rating of his political leadership would again be reversed if the budget creates more problems than it aims to solve.     

While RW has placed high hopes on the budget to set the economy along a growth path and rapid transformation, and along the lines recommended by the IMF, the international credit agency Fitch, has further downgraded Sri Lanka’s credit rating from CCC to CC. That agency must have had a chance to study the budget, its promises and action plan before making its decision. Its downgrading therefore injects an element of pessimism on budget expectations. On earlier occasions and during GR’s presidency when such downgrading was announced the then CBSL chiefs Professor Lakshman and Nivard Cabraal immediately accused the agencies of bias and unfairness. But this time, the new chief Dr. Nandalal Weerasinghe had kept silent implying that there are grounds that warrant Fitch’s pessimism.

Among the reasons the agency had given are, (a) probability of local currency debt default, because of high domestic interest payment/revenue ratio, high interest costs, strict domestic financing conditions and rising local-currency debt/GDP, (b) uncertainty over external debt restructuring, (c) doubts on budget measures for fiscal consolidation in spite of high rates of taxes, and (d) political risks.

The first of these reasons arises mainly because of SLBC’s surrender to political pressure and therefore loss of its independence. That loss was particularly prominent during GR’s presidency. After appointing Lakshman as the chief, GR virtually commandeered that institution and demanded cooperation from the monetary board to implement ‘his’ economic policies which were more the outcome of thought bubbles than sound analysis of issues at stake. In accepting his role of abject compliancy to a politician, the Professor shamefully contradicted Keynes who said, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist”.

Instead, the academic economist turned slave to a defunct politician. His successor, Nivard Cabraal, who already had a blemished record as CBSL Chairman over the Greek Bonds scandal, was politically astute and decided to go along with GR without any pretention of independence. Both chiefs silently watched the economy descending towards its nadir. Now the new man NW is trying hard to maintain a distance between political pressure and economic necessity, but supports RW’s view that hard decisions have to be made to avoid further worsening of the economy. RW himself has assured the bank’s independence.

However, even with independence, central banks in general have become somewhat of an anachronism in a world of robotic financial capitalism, in which money itself has lost any specific definition. If one does not know what money is, how does one control its supply? Thus, to rely on any specific monetary policy to manage a modern economy is like shooting a bird flying in dark clouds with a rusted gun. Fitch’s downgrading in this context should be seen as an added pressure on CBSL to toe the line of IMF fully which, if happens, would reverse RW’s rising popularity sooner than later.

Regarding restructuring of national debt Fitch also has concerns. Recently, China’s foreign ministry spokesperson Mao Ning was reported to have called all creditors to cooperate with China to settle this problem to counter international community’s finger pointing at China for dragging its feet to come to the table for talks. The longer the delay in resolving this issue less would be the chances of receiving IMF’s $ 2.9 billion loan even by the end of March next year. That delay would jeopardize RW’s budget targets.     

Of all the reasons, it is Fitch’s doubts over financial consolidation that needs serious consideration. In one of the previous contributions to this journal (see, “RW’s Budget of Hopes and Politics”, Colombo Telegraph, 17 November 2022) it was pointed out that implementation was the weakest point in RW’s budget. That implementation itself is part of a larger issue of corruption in public administration. A shocking revelation by GMOA that a staggering sum of Rs. 773 billion of taxes and penalties remain uncollected by revenue officials is a telling instance of administrative inefficiency undermining any legislative decision. Of what use are new taxes, asks GMOA quite legitimately, if they cannot be collected?

In the same vein, of what use are pious pronouncements of transforming the economy into an export driven dollar machine when a good part of the dollars accrued would escape into foreign bank accounts and tax havens? When elected members of parliament themselves are not fulfilling their tax obligations why should the others oblige? On one occasion, even the new CBSL chief urged tax administrators not to exempt anyone from fulfilling their tax obligation. Before him, when the World Bank set conditions for its financial assistance, the bank not only demanded structural reforms but more importantly, “the root structural causes that created the crisis”. It is that root which runs the ‘system’! However, it is in improving the efficiency of tax administration in particular and administration in general that the fourth reason, political risk, arises.

Financial scandals and plunder of public funds by political leaders and high officials have a long history in this country. For example, should anyone be reminded of the loss of $ 200 million in Greek Bonds during Cabraal as Governor of CBSL? Or, the saga of Bond Scam during MS-RW’s Yahapalana regime? Or, Rajapaksa family’s involvement in the Pandora Box revelations? GR promised to investigate the last, but it never happened. Given this state of affairs in which rogues, looters and swindlers could get way with economic crimes, does anyone seriously believe that the tax department would be able to nab all tax dodgers, let alone scrutinising the legitimacy or otherwise of sophisticated tax minimising techniques adopted corporate entities and financial moguls?

Without taking strong action against tax dodgers, corrupt officials and rogue politicians, some of whom are inside the parliament supporting RW’s presidency fiscal consolidation would remain an unrealisable objective. But to take strong action would undermine RW’s political manoeuvrability. This then is one side of the political risk that Fitch identified. The other side arises from a market equilibrium that keeps on shifting upwards, because of increasing scarcities and inflation, and deprives more and more individuals and households from enjoying the benefits. With insufficient income support and with inefficient distributive mechanism public discontent would increase.

People may endure difficulties for a short time provided the ‘system’ works impartially and injects confidence in speedy recovery. But the ‘system’ itself is fundamentally rotten and RW has no intention of throwing it out. While his political rating is currently pointing towards north, Fitch’s crediting rating and surrounding economic pessimism would eventually pull it towards south. It is to prevent this potential divergence that RW wants to stop another aragalaya at any cost. But can he?  

(The writer is attached to Murdoch Business School, Murdoch University, W. Australia.)