Untitled Document

Economic reforms and the correct 'mind-set'
(Excerpts of the speech delivered by Dr. Wickrema Weerasooria at the 7th annual oration 2002 of the Faculty of Taxation of the Institute of Chartered Accountants of Sri Lanka).

Resisting reform: the blatant corruption at the Customs has withstood all reform efforts.

Any person involved in a reform agenda must have the correct 'mind-set'. Those entrusted with the task must be reform driven! There must also be a sense of urgency. This is because reforms of any kind are never popular. Reforms affect people. Reforms often displace many of the people involved in the reforms. The best example is privatisation, which immediately involves downsizing and staff reductions.

Hence, there is an inbuilt aversion to reform or an indifferent or go-slow attitude. This applies to the very regulators and policy makers entrusted to drive the reform agenda. The normal response is to set up a Committee and build up documentation and files with several seminars and conferences thrown in. The final implementation is lacking. The financial, monetary and fiscal sector has not been an exception to this general rule.

However, with my long experience in the public sector and as a former Secretary of Plan Implementation, I can confidently state that meaningful steps are being taken today to reform and strengthen the financial sector.

Financial sector reforms
The Prime Minister appointed a "Task Force" of about eight to ten persons to prepare an Action-oriented Executive Summary of about 20 - 25 pages.
Next, taking that 25-page Executive Summary as the base, the Prime Minister set up what is now popularly called the Financial Sector Reforms Committee (FSRC) to implement the Executive Summary with any modifications or improvements as necessary. The FSRC is housed and serviced by the Central Bank. It is chaired by the Central Bank Governor, Mr. A.S. Jayawardena and when he is unable to be present, by one of the two Deputy Governors. Mr. R. Paskaralingam Advisor to the Prime Minister is a leading member of the FSRC. He attends every meeting. No meeting is held without him and meetings which are held every two weeks are fixed to suit him.

Exchange control is being liberalised. The 'current account' transactions are already free of control. The FSRC has recommended that 28 items of the 'capital account' be also freed under existing law. Of these 28 items, nine items were freed in the Budget of 6 November. It is for the Treasury to free the others. The Exchange Control Act of 1953 is to be repealed and replaced with a 'more friendly' Exchange Management Act where exchange control offences, if any, are decriminalised in the sense that any contravention will result in a civil penalty and not a prosecution. The Finance Minister referred to this legislation in the Budget. As an eminent lawyer he referred to those who contravene or ignore the law as "errant citizens". I like that term. It is more user friendly like errant schoolboys who play truant!

The Fiscal Management (Responsibility) Law is now before Parliament.
In his budget speech, Mr. K.N. Choksy also spoke of an Economic Management Law. We, at the FRSC, have not seen this law and it may be coming from the Treasury. It has a limited but very useful objective. It will impose strict time limits on ministries to submit annual accounts and performance reports to the Ministry of Finance, commencing from the financial year 2002.

Starting in the third quarter of 2003, government departments who violate these requirements will have their funding curtailed. Monetary law and Banking Act amendments had been finalised before the FSRC was set up and are now before Parliament. The main amendments to the Monetary Law Act (MLA) is that the core-objectives of the Central Bank have been changed to economic and price stability and financial system stability.

Secondly, the Monetary Board which now has three members (Governor, S/Treasury and one other) is enlarged to five (Governor, S/Treasury and three others). We should welcome this change. The Banking Act amendments strengthen the supervisory and regulatory powers of the Central Bank relating to licensing procedures, revocation of banking licenses, amalgamations, liquidation and closure of banks, qualifications, appointment and removal of bank directors and senior management.

In 1993, banks were given special parate execution powers which are of a judicial nature to recover immovable properties mortgaged as security for loans. The non-performing loans of banks are the main problems. Newspapers are now full of Board Resolutions selling mortgaged property of defaulting debtors.
Over the past ten years, the special procedure under this parate execution law became ineffective because of injunctions and enjoining orders granted by Courts without notice to the Bank.

The amendments to the law seek to overcome this problem. Also the special procedure is being extended to all licensed banks - both commercial and specialised including the foreign banks and licensed finance companies so as to create a level playing field. All these institutions rely on public deposits and willful defaulters of non-performing loans threaten the security of the deposit base.
There are many other new financial instruments and methods of finance which have become popular in developed countries where development has been slow in Sri Lanka. We all know that it is computer technology that is driving this development.
Among the new methods of financing which are complicated and exotic but yet gaining ground are,

Securitisation generally and asset and mortgaged backed securitisation.
Multi-lender financing and syndicated loans.
Sub-Participation and Club loans.
Large scale equipment lease finance.
New methods of project and infrastructure financing.
Receivables and Asset and Inventory finance.
Developments in unsecured Financing such as negative pledges, personal property securities and what are called "Dematerialised and Immobilised" securities.
Subordinated debt, set-off and Netting.
Derivatives, Forward Contracts, Futures, Options and Swaps.

Drafting new laws
In our reform agenda we are conscious that the financial/monetary/banking sector in Sri Lanka as elsewhere is driven almost entirely by the private sector unlike for example like sectors such as education, health, electricity, water supply etc. Hence we have advocated the following guidelines when considering legislation. First, we ask do we require legislation? Can't we do with non-legislative Codes of Conduct or Memoranda of Understanding? If there has to be legislation, it should be minimal, non-intrusive, facilitatory rather than regulatory, and not establish bureaucratic statutory bodies that will become a burden on the consolidated fund.

Also, the legislation we are drafting must be user friendly and use plain English - although today in the event of an inconsistency it is the Sinhala text that prevails. Above all, any legislation must be drafted only with the concurrence of all the stakeholders. Gone are the days when the government could not care for the views of the private sector and the professional bodies of the country such as your Institute.

Currently, the incorporated body and the legal entity is not the Central Bank but the Monetary Board. We have now appointed a small committee of about seven bankers to put together a new Act and we hope to complete the work by March 2003. The same committee will also formulate a new Banking Act with necessary modifications. Any suggestions or assistance from the Institute in the drafting of both these new Acts (or for that matter, any other legislation in this area) will be most welcome. The Central Bank invariably appoints external auditors so members of this Institute are well aware of current shortcomings, if any, in the legislation, which we can examine and overcome.

Laws on money laundering, computer crime and electronic transactions have already been enacted in most developed countries. According to the banks and other card issuing agencies, like Visa/Master Card, there is currently no law in Sri Lanka to cover credit card fraud and when the Police investigate and offenders are prosecuted, they invariably get acquitted for lack of proper laws and the offenders soon re-offend.

We have, with the help of the banks, prepared legislation to overcome these loopholes. As regards users of cards and ATM's and Banks, we have agreed in principle to have a Code for Electronic Fund Transfers (ETF) similar to the Codes used in countries like England and Australia. As an initial step, we feel a Code is sufficient so that each customer or user knows his liability for any unauthorised use, etc. For example, if an unauthorised person or thief uses your card for what amount are you liable?

Banking code of conduct
The Sri Lankan banking industry is agreed about a banking Code of Conduct between the bank and each customer. Though non-statutory, the Code will be considered a contract between the bank and the customer and may be contractually enforceable for any contravention of the Code. We can with modifications, adopt the Indian Code on this subject.

As regards a banking ombudsman it is a different story. While most developed countries have set up non-statutory banking ombudsman schemes, banks here seem to be lukewarm about the idea and I have not witnessed any support for it.

In summary, the shopping list of new legislation is a new Monetary Law Act, Banking Act, a new Exchange Control Management Act repealing the current Act, improvements to Debt Recovery Law and Special Recovery of non-performing loans, Criminal liability for the issue of cheques without funds, Money Laundering law, Computer Crime and Electronic Transaction Law, Prosecution for unauthorized use of Credit Cards and ATMs, EFT Code of Conduct and Banking Code of Conduct.
There is one other law that I should mention here because it affects all of you as well as Accountants.

The Minister for Commerce and Consumer Affairs has obtained Cabinet approval for a new Act called the Consumer Affairs Authority Act. Basically, this new legislation will repeal and replace the following:

i. Consumer Protection Act No. 1 of 1979.
ii. Fair Trading Commission Act No. 1 of 1987; and
iii. Control of Prices Act (Chapter 173).

The above new Act will apply to banks and all financiers (including finance companies) and all Accountants because "services" under the Act means;
Service of any description which is made available to actual or potential users and includes:

a) banking, financing, insurance, entertainment and shipping …."
b) Services provided by professionals including lawyers, doctors, accountants, surveyors etc.

So look out, because it is very easy to sue for breach of consumer protection law. It is not like suing for breach of contract or in tort for negligence. As I emphasised earlier, the greatest hope we have for the success of the above Reform agenda is the keen interest and driving force of the Prime Minister. Many people - mainly from the private sector contact the P.M. He hears them and if they have a good idea or request, Mr. Paskaralingam is asked to take it up at the FSRC meeting.

ometimes, the person or institution making the representation is invited to present his or its views at the FSRC. This has happened successfully on several occasions.
Another force that drives the FSRC is the IMF/World Bank Missions and reports on Sri Lanka. As a part of the Peace dividend more such Missions are arriving now.

IMF/World Bank suggestions for reforms are highly technical but they are dispassionate and worthy of close study for implementation - despite the cry now so often heard that everything this government does, from the Budget to other Reforms, is done on the dictates of these two international institutions. Apart from the IMF/WB, there is also the ADB.

One must not get involved in any reform agenda unless he is committed to the task. You cannot be half hearted about it or be engaged in it just to please others. Secondly, you must study how reforms in this sector were conceived and implemented globally. I call it the requirement of a necessary "mind-set".

Our ancestors knew nothing of commerce, banking and finance or monetary or fiscal policy that is now part of our economy. Sri Lankans were basically an agricultural community with established service tenure systems. Our caste system further strengthened the service tenure system. It was only after the British conquest of 1796 that we learnt of commerce, as we know it today and there was also no commercial development in the island until after the coffee plantations commenced in the early 1830s. Our first bank - a short-lived Bank of Ceylon - was established in 1841. Prior to the British, the main exports from Sri Lanka were spices, gems and elephants.

To put it more bluntly, Sri Lankans were agriculturists, not traders. Thus, when it comes to reforms in the financial/monetary/banking/ and fiscal areas, we must be conscious of our 'restricted mind-set". If we start from the year 1796, the year of the capture of Sri Lanka by the British, most of us are at most only fourth generation 'entrepreneurs' in financial matters. Even after Independence in 1948, there is no "Sri Lankan innovations" we can boast of. We got world status in One Day Cricket, and once we were the champions, we have one bronze winner at the 2000 Olympics (Susanthika Jayasinghe) and a silver winner at the Olympic Games of 1948.

Duncan White). We have one world class internationally renowned judge and jurist (Professor Weeramantry) and we have one Sri Lankan who headed an International Organisation (UNCTAD), namely Dr. Gamini Corea. There is also the world-renowned science fiction writer, Sir Arthur C. Clarke who is now a distinguished citizen of Sri Lanka. We have very little to boast about. We are weak at innovations but good at imitation. The British not only colonized our country, they colonized our minds. Our Parliament, our Laws, our Courts, our Banking/Financial System, our Company Law, Partnerships, Agency, Sole Trading, Import/Export systems, our Tax System, our Customs and Excise System, our Professions whether it be Law, Medicine, Accountancy, Surveying, Marketing, etc. etc. are all moulded on foreign concepts which are mainly British based.

In the area of Social Sector reforms and development, however, we have indeed developed some of our own indigenous programmes - not borrowed or copied from the West. For example - Sarvodaya (Social mobilisation), Janasaviya (Poor-relief), Samurdhi (Poor-relief), Gamudawa (Housing), Mahapola (Trade fairs and University scholarships) and Swarnabhoomi (Land grants).

I earlier emphasised 'the mind set' necessary for reforms. We must be pragmatic/practical in our approach and committed to the reforms. We don't want mere 'file carrying' members of committees who come only to mark their attendance nor do we want people who only talk a lot and do not follow up on decisions. There is also a sense of urgency.

Since this audience consists mainly of accountants who live with figures, let me conclude with some mind boggling figures of our current economy. I have taken these figures at random. Money spent on education is interesting. Rs. 6 billion is spent on our university education system which is free. Nearly five times of that - Rs. 20 billion goes out of Sri Lanka for education abroad and the tuition industry costs add up to about another Rs. 20 billion.

As against the above figures, take revenue derived from taxation. According to Inland Revenue Report for 2000, of the total revenue collection of Rs. 116 billion, only 22% came from income tax. Sri Lanka has a work force of about 5 million (out of a total population of 19 million). Only 161,000 individuals pay income tax including individual partners. Additionally about 213,000 persons pay tax through the PAYE Scheme.

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