Editorial

Sovereign Terror

The UPFA government's decision last week to seek a sovereign credit rating for Sri Lanka took both the financial and the political sectors by surprise. The government was, no doubt, emboldened by the fact that exports had overtaken imports in the past quarter, something quite unusual in Sri Lanka's balance of trade. Basking in this glory, and possibly buoyed also by the fact that the stock market is booming, the decision to seek a formal credit rating for itself was probably inevitable. With the drying up of foreign aid thanks to the political impasse between Colombo and Kilinochchi, the Treasury has little option but to borrow in the international money markets; and it clearly has found itself thwarted in that endeavour by lacking an 'A'-grade credit rating.

This is not the first time Sri Lanka has toyed with the idea of applying for a sovereign rating. The UNF government that was turfed out of office last April also considered the idea, and then abandoned it. Indeed, then Central Bank Governor A. S. Jayewardena was adamantly opposed to the proposal, worried that it would jeopardise the government's future borrowing prospects. The problem with the assessment process is that it is both coldly objective and cynical: cute smiles and innocent platitudes get you nowhere.

As usual, it appears that the Kumaratunga administration has opted to go where angels fear to tread. Of the South Asian countries, only India and Pakistan have obtained sovereign ratings as at now, and that is in the 'B' region. No others have dared apply. And of the Asian countries, it is only the outstanding economies such as Singapore's and Japan's that have scored 'A's: even Malaysia and Thailand are in the 'B' category. In any event, seeing that India, which has for the past decade been stable, democratic, transparent, prosperous, peaceful and growing (six things Sri Lanka most certainly has not), there is every chance of our becoming the proud owners of a 'C' rating, thereby putting us amongst renegade nations that have defaulted on their debt, such as Argentina.

The other aspect of the sovereign rating system, which is fraught with danger, is that it reflects historical trends: is the country getting better, or it is getting worse? Thus, for example, even assuming for the nonce that we can win a 'B' rating this year, should we slip to a 'C' next year, it would seriously undermine our government's ability to borrow. Kumaratunga could mess things up well into the future, far beyond the horizon of her presidency.

It would be a mistake for the government to seek to ride on the back of the recent trade balance or stock market boom, for these indicators do not necessarily reflect its creditworthiness. The trade balance statistics favour exports simply because the rise in the cost of living has reduced levels of consumption, and therefore prosperity and imports, in the country. Likewise, massive speculative investment in the stock market does not mean the nation is growing richer: it means that this is one of the few places in which investors think they can make a fast, tax-free buck. They invest at their peril in equity in an actual business, where an iniquitous tax regime is resulting in a rapid recession. The number of new businesses being registered has declined sharply over the past year.

The best rating Sri Lanka could hope for is a 'B'; i.e., "[a] significant credit risk is present, but a limited margin of safety remains... capacity for continued payment is contingent upon a sustained, favourable business and economic environment."

However, there are many things that stand in the way of actually winning a 'B' rating. Prime amongst these would be the government's U-turn on the tax amnesty bill, that withdrew a reprieve already granted to some 30,000 people. Quite apart from showing an inability to sustain financial policy, the fact that the repeal specifically reasserted the government's commitment to exchange controls will not go down well in the assessment process. The problem with exchange controls is that by making itself the sole trader in foreign currency, the government in effect controls the exchange rate, thereby giving itself a source of cheap dollars to pay back foreign debt at the expense of the domestic economy. This has also led to a resurgence of a black market in foreign currency, which directly undermines confidence in the rupee. Statements by various ministers that a decline of the rupee is a good thing, because Middle East workers thereby get more for their riyals, have not helped the government's credibility, either. All this hardly makes for the "sustained, favourable business and economic environment" the sovereign rating assessment demands.

Then again, there is the government's domestic creditworthiness, which is abysmal. Uncontrolled government borrowing through the late 1990s sent interest rates high into the teens. Its attempts to repay domestic debt simply by printing money drove inflation into double-digit figures through most of the past decade, and with it, interest rates. Now, government ministries and provincial councils have taken to running up enormous credit with the private sector: they buy goods and services, and then "do not have money to pay" for months on end. The net effect is that in order to stay liquid, the private sector borrows from banks, driving interest rates still higher. All this is unlikely to send the right signals to the stone-eyed assessors of Fitch Inc., whose apprehensions are unlikely to be assuaged by a coy and roguish smile from Her Excellency.

Additionally, Sri Lanka is likely to score badly on other assessment criteria, including having "a regular election timetable" (Chandrika Kumaratunga's snap election last year, having assured the international community that she would do no such thing, will no doubt surface once more). So will the fact that her double swearing-in has in effect left the date of the next presidential election in limbo. On several other fronts too, we will fail miserably: "method of leadership succession" (Kumaratunga's constitutional games to keep Mahinda Rajapakse out of the presidency); "durability of policy directions" (dual-rate VAT, domestic bad debts, peace process, tariff increases); "rationale for financial reforms" (tax amnesty withdrawal); and "growth of armed forces" (inability to make peace with the Tigers and the increasing risk of renewed warfare, for which both sides are even now arming).

The whole world knows that the Sri Lankan government is locked in a hopeless battle with itself, unable to move because of the tension between the JVP and SLFP, demonstrated not least by the former forcing the prorogation of the Western Provincial Council only last week, after subscribing to corruption allegations against its Chief Minister, Reginald Cooray, a close confidant of the President and a former SLFP minister. Cooray himself has not helped matters much. Rather than clear himself through a full disclosure of the facts, he has challenged the authorities to prove him guilty, in which case he has graciously offered to resign. Should he be proved guilty, the contingency of resignation would of course hardly arise as he will be put safely behind bars.

Not only is the government and its principal political partner, the JVP, pulling in different directions, so are the other allies (e.g., the CWC vis-…-vis the Upper Kotmale hydropower project; the NUA vis-…-vis the joint mechanism for tsunami aid distribution). All this has, not surprisingly, led to administrative gridlock. It is astonishing that with such mayhem afoot, the government should seek a formal rating of its ability to repay past and future debts, for not even the most optimistic assessment can give it a positive rating.

Perhaps most damning for the government is the re-emergence of state-sponsored violence, not least the fact that several journalists critical of the government have been attacked, and several killed, over the past few years. The killers have never been brought to justice. Also damning is the President's gloating about a proposition made to her to murder "an editor or two" by a senior minister of her cabinet, a matter she failed, in a dismal display of moral turpitude, to place before the police. On some occasions, such as the assassination of dissident Kumar Ponnambalam, the trail of blood has led right to the doormat of President's House. And there is no sign of an end to the slaughter.

Just last Thursday, the Editor of Tamil Net and a senior journalist with the Daily Mirror, Dharmaratnam Sivaram was abducted in Colombo. His body was found the next day. The abduction was in the style that has come to be typified in the Kumaratunga regime: the journalist was bundled into a luxury four-wheel drive jeep of the kind used in ministerial escorts, and driven to his death. Ominously, just a week previously, government MP Wimal Weerawansa called repeatedly and hysterically on the public to attack journalists critical of the government's and his own policies. Sivaram was just that sort of journalist: a bitter critic of the government's performance in general, and Weerawansa's in particular, especially with regard to the peace and refugee rehabilitation processes.

Indeed, the Editor of this newspaper himself has been on separate occasions physically assaulted and shot at, with the trail leading extremely close to leading government personalities. The government's culpability was also shown by the fact that the police declined to conduct a meaningful investigation, and by the fact that the police protection loudly offered to the Editor by the government in the aftermath of the attacks never materialised. And it is this government that now seeks a sovereign rating for its creditworthiness. The sad thing is that for the sins of the President and her government, it is Sri Lanka that will pay. But then again, what else is new?