Charting the way forward: We are already late

The interim government that took office on 8 August needs to undertake a transparency exercise on the state of the economy in order to chart the way forward and also to articulate concrete measures: policy and institutional. This transparency exercise may be done through preparation of a so-called White Paper. Such a White Paper, particularly a government-sponsored one, has a number of advantages; it allows us to understand a complex situation to tease out the major issues underpinning the situation and also prompt us towards the way forward.

The advantage of the White Paper is that it doesn't bind the government to specific policy commitment. It is quite open-ended. On the other hand, it is a very important and useful tool for participatory and democratic policymaking. Because it is usually prepared through very intense exercise. On one hand, it does look into the data situation, empirical evidence, but it also takes on board the concerns of key stakeholders so that it somehow creates the ownership of the document.

Subsequently, it remains as a benchmark when the government picks and chooses specific measures out of the recommendations.

This is very important for the current government because it needs to tell the nation where it is starting from. When the government wants to measure the success, the White Paper remains as a benchmark to compare with and also to protect itself from disappointments and discontent which may eventually come with slow progress and less effectiveness.

So, I think it is very important for the government to prepare a White Paper.

A parallel exercise should be done on three things – the first one is a White Paper.

The second is creation of a Data Commission since the state of public data has been a major concern for all of us. Personally, I have called it data anarchy, data blindness, and data disappearance. This was a major issue throughout the recent decade. This deplorable situation of the public data not only gave distorted signals to the market and confused the market, but also created a hallucination for the policymakers.

5th pillar – public data

In my view, the public data and information system should be the fifth pillar of the state after four well-known pillars of democracy – legislative, judiciary, executive, and the media. I think public data has to be recognised as the fifth pillar.

From that point of view, this Data Commission I am talking about should focus on cleaning up the data. I am not asking them to re-estimate the GDP series. What I am trying to say is that such a commission would identify the fault lines and discrepancies that we, the practising economists, have been pointing out throughout the last decade.

We have shown that the proxy indicators do not tally with the growth rate that has been reported. We have shown that the investment figures do not match. Private investment figures have also not matched the growth figures. We do not have reliable employment data, and even our inflation rate data is being questioned whether it reflects reality.

What we want this Data Commission to do is identify the fault lines so that they can be followed up by technical experts. The commission should also recommend a governance structure that protects the public data system from political and administrative interference in the future.

Moreover, the commission should guide how to address data gaps, making them globally comparable and of high quality, so that at the end of the day, the global community – international development partners, foreign direct investors, and those who are importing from Bangladesh – all can put their trust in our data.

This is particularly important for entities rating our economy, like Moody's or Standard & Poor's, so that they can rely on our data instead of conjuring figures themselves.

The third one is the much-awaited Banking Commission. What it needs to do is first conduct a transparency exercise to establish the real magnitude of non-performing loans (NPLs). First thing is all the window-dressing that has gone into it should be shredded to pieces.

The second task, apart from establishing the real situation, involves the provisioning of the NPLs, assessing the capital adequacy of the banks that have issued these loans, and conducting an overall risk assessment for each of them. The Banking Commission should work quickly on this.

Beyond diagnosis and transparency, the Banking Commission should also play a prescriptive role. It should articulate a robust but feasible exit policy for defaulters, ensuring that this does not affect the interests of depositors or undermine future investment prospects.

Additionally, the Banking Commission should review some legislative and regulatory measures. For example, it should consider the write-off policy – under what circumstances and with what consequences can a bank write off bad loans.

The commission should also look into the single-borrower exposure limit, which banks often do not abide by, sometimes due to unrealistic capital assessments that are underreported or undervalued.

Further, the commission should examine the Banking Company Act, focusing on the number of directors from sponsor families, the tenure of these directors, and the time limit on how long they can serve. Transparency in the classification of these matters is crucial, as is ensuring that the classification standards and compliance with banking standards like Basel III are met by the central bank.

The introduction of independent directors was a good idea, but it has often led to collusion. The vetting of independent directors needs to be more rigorous.

The Banking Commission should also review the mandate of the central bank. It is often said that the central bank needs autonomy, but as the former governor of the Central Bank of Sri Lanka remarked, the autonomy of the central bank is not written in legislation; it is written in the mindset of the Governor.

Therefore the choice of the Governor is obviously crucial. Now that we have a vacancy in the central bank's top post, it is a unique opportunity for us to select a man or woman, an expert with the right mindset, and provide them with the necessary support from the government.

The scrutiny of the central bank's mandate is also important. Equally significant are the choices of the top leadership and board members ensuring proper stakeholder representation on the board, with expertise free from political leaning or vulnerability.

It is vital that management leadership is competent, so the professional progression of the central bank executives must be ensured. Central bank issues are an important part of this discussion.

Another crucial reform needed for the central bank is to bring the banking division from the finance ministry under the central bank's control. This would ensure that not only private banks but also state-owned banks fall under the central bank's jurisdiction. The central bank should also have full authority over the appointments of the chief executives of nationalised commercial banks and state-owned banks.

Blue-ribbon committee

This leads to the question of whether we should create a blue-ribbon committee for the corporate governance of banks. The directors are often appointed randomly, purposefully, and with the expectation of favours. How can we protect corporate governance from these types of appointments? The idea is to create a blue-ribbon committee with eminent people with expertise and credibility, who will vet the appointments of chief executives and directors of banks. We need a vetting process that is protected from political interference.

Corporate governance is a critical issue, and the Banking Commission needs to be set up with clear terms of reference, a relatively limited timeframe, and the necessary logistical and administrative support. This is an immediate necessity, because, at this moment, we face a double jeopardy: a dysfunctional banking system and absentee leadership. We must address both of these issues simultaneously – to keep the system functioning while diagnosing and making it fit for purpose.

From this perspective, I would immediately expect these three institutional measures: a White Paper on the state of the economy to prompt the way forward, a Data Commission, and a Banking Commission.

Apart from these three, other areas need attention. For example, when we talk about the banking system and the transparency exercise, it must be composed of experts with the necessary experience and support from the administration. Insiders should not be deprived of ownership. The key stakeholders, particularly the private sector and experts from different sectors, must be involved.

One starting point for the transparency exercise could be position papers or summary inputs from the state of affairs in their respective ministries. The top ministries, like the energy ministry, should prepare these, and so should the NBR, finance ministry, commerce ministry, food, and agriculture ministries, and social welfare ministry. These contributions are essential to guide the process.

We have often said reform depends on political will, but what is political will? It is a visible, monitorable indicator of a government's strength, demonstrated through reform measures that take a stand against major vested interests which have created the problems. Unfortunately, this kind of political will was not evident in the previous government.

There is an issue of legitimacy here. The government's actions must be publicly acceptable and considered legitimate. This White Paper exercise would provide that legitimacy through a multi-stakeholder consultation process, which would allow the government to exercise its executive power and create public ownership.

In implementing reforms, there are two management issues: high ambition levels versus a complex reality, and the balance between aspiration and capacity.

I see this double trap here. One is your ambition and your reality. The other is your aspiration and capacity.

When I say capacity, reality is there, but it is more than that. There is the political economy of institutional interface, various kinds of things, and your own competence. So, the other is the capacity. This too has to be always understood in the context of the tenure of the current regime.

Since the tenure of the current regime remains a bit uncertain, it should really move in certain ways to address that.

If I had to add a fourth one, apart from the three, I would have done a resource assessment, particularly focusing on debt and foreign aid flow, and fiscal space.

On the resource issues, particularly focusing on debt management, debt repayment, debt rescheduling if necessary, ensuring the flow of the committed ODA now in the pipeline, which is quite good, but at the same time revenue collection, financing of the ADP, and looking into the future in terms of strengthening local government devolution of finances.

All these things have to create a new benchmark for the 9th Five-Year Plan because until we do the data exercise and ensure the reforms, it will neither be possible to plan for the 9th Five-Year Plan targets nor to have a fuller idea of how much growth we are talking about. Given that we don't know the benchmark values and the policy framework we are going to use.

Apart from the institutional structure, the reorganisation of the Planning Commission if necessary, and other issues as well, my humble point is to go for a transparency exercise immediately. I think we are already four days late on that.

And then the Data Commission, the Banking Commission, and the resource assessment. If you want me to do a fifth one, I would have gone for the energy sector and food security.

Immediate steps

Certain steps need to be taken over the coming weeks to keep the economy steady.

One is, of course, the power sector; the other is connectivity and logistics. Third is to keep the supply chain uninterrupted, both in terms of the import chain and export chain. Maintaining the supply chain uninterrupted is crucial. We have seen that taking away market disruptors who collect tolls through corrupt practices can have a soothing impact on the market. How we can sustain that has to be seen. So part of it is also a transparency exercise because we need to know how much we produce. We should not exaggerate our grain production figures and then import at the last moment, giving rent to another importer who is privileged and connected to their system. So, market management takes a bit of art and data management is crucial.

This article is based on a conversation with Debapriya Bhattacharya, a Distinguished Fellow at the Centre for Policy Dialogue (CPD)