A new public debt law. A pillow cover change for headache? Punish those responsible for default?

 

Article's Background

I felt shamed when I saw the attached video (Watch video here) on the meeting of the COPF, Parliament, on 22 May 2024, held for examination of the proposed public debt management law for Sri Lanka.

At the beginning of the meeting, it was stated that 

  • Work on this law had been in progress since 2016 although it was delayed due to various reasons and 

  • The work has now recommenced as a condition of the IMF programme due to the current debt unsustainability situation.

I felt shamed due to two facts.

  • First, the proposed new debt law is now presented after 8 years of delay only after the bankruptcy of the government. This work seriously started in early 2016 as the danger of debt management by the central bank (CB) since 1950 was foreseen at that time.

  • Second, some of professionals who disrupted the work on reform initiatives on debt management inclusive of consolidated public debt law in 2016 attended the COPF as brand new professionals. The monetary policy team of the CB was dead against such reforms for debt market development with transparency due to various hidden agendas. At that time, their fondly debt market structure was the private placement desks to control the interest rates/yield curve for the monetary policy against the global principle of competitive and transparent debt markets.

Therefore, this article is to highlight the debt management reform agenda pursued in 2015-17. Since I also was actively involved in driving the work, I have the recollection on many events.

The purpose of reform was to allow for a simple economic principle to work in the debt market, i.e., a transparent and competitive market with modern technology that would improve the price discovery, liquidity and discipline of both debt issuer and investors.

It was the new policy of the then government and the CB as they foresaw grave risks of debt unsustainability despite the fact that the most part of debt management and market had been handled by the CB under the Monetary Law Act, Local Treasury Bill Ordinance and Registered Stocks and Securities Ordinance as amended from time to time.

 A short list of historic reforms - 2015-2017

1. Full scale of competitive auctions of local government securities (Treasury bills and bonds) was introduced in place of 90%-95% private placement system.

2. Bloomberg electronic trading platform was introduced free of charge and required dealers to trade through the platform and to report trade details of large value customer transactions. This platform was arranged by the Bloomberg free of charge.

3. Active Liability Management Act was passed to facilitate restructuring of the debt profile for better management of debt composition and service risks.

4. The US Treasury Department offered technical assistance through a resident consultant to reform debt issuance and management system. It offered services through several consultants arranged by the resident consultant. Drafting a consolidated debt law was one of the assignments. The CB provided secretariat facilities to US consultants. The programme was arranged by the Ministry of Finance through the US Embassy.

5. Expression of interests were called for establishment of a dedicated electronic trading platform for government securities. Cabinet appointed Tender Board and Technical Evaluation Committee commenced the work. The CB allocated funds for the cost of the platform and the US Treasury provided technical assistance.

6. Upon a national budget proposal, the work commenced to set up a debt office at the Treasury to implement the reform agenda. It was initially expected to amend the existing laws to replace the CB's debt functions with the debt office and to assign exiting debt infrastructure of the CB with the debt office.

Performance on reform initiatives

1. Private placements reintroduced.

2. US Treasury assistance discontinued without deliverables agreed.

3. No news about electronic trading platform and Bloomberg platform.

4. No news about the implementation of the Active Liability Management, except the CB raised additional debt under the limit of the Act.

5. The CB's  continuity in the aggressive use of debt to fix yield rates/interest rates for driving the monetary policy rather than market-based debt management in public interest.

6. The good governance-based government was thrown out on political allegations of public debt auctions and losses while the private placement network took back the full control over debt management.

7. Foreign debt in defaulted for the past two years since 12 April 2022.

8. De-facto default of domestic debt by forced restructuring of debt held by EPF and CB under laws passed by the Parliament during a special bank holiday period announced by the CB to prevent market volatilities.

9.  Bankruptcy of the government and foreign currency crash confronted by the economy and public.

10. Foreign consultants employed during the past two years for the management of debt for the sustainability.

11. The official managers awarded with promotions and brand new independence from the government.

Public concerns

  • The government brings new debt management laws in association with those who mismanaged and defaulted debt without any inquiry over the mismanagement and default.

  • Reform agenda highlighted above in 2015-17 would have prevented the present catastrophic bankruptcy of the government if it had been implemented orderly. Nobody seems to worry why they were not implemented.

  • New laws will help only a new line of debt/government bureaucracy unless the debt market is developed for the transparency and competition with new technology that will promote the price discovery, liquidity and debt discipline. Nobody seems to worry about conflicts between laws and markets in economics when laws after laws are passed to recover the economy from the crash in 2022.

  • The government through new laws only punishes the public for debt mismanagement while being surrounded by those who mismanaged debt and caused bankruptcy. This seems to be a part of debt politics that has prevailed in the several decades of the past. Therefore, the recovery being painted on new debt management story proposed by same old debt politics will be nothing but the next disaster.

This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures. All are personal views of the author based on his research in the subject of Economics which have no intension to personally or maliciously discredit characters of any individuals.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 12 Economics and Banking Books and a large number of articles published.  




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