15 NOVEMBER 2018
Turn the page
Sri Lankan President Sirisena must find a way to work with Ranil Wickremesinghe
After three weeks of political turmoil, Sri Lanka’s controversially dismissed Prime Minister, Ranil Wickremesinghe, appears to have gained the upper hand. A majority of lawmakers backed a no-confidence motion in Parliament against Mahinda Rajapaksa, a former President who was sworn in Prime Minister on October 26. The Speaker declared the motion to have been passed by voice vote, as Mr. Rajapaksa’s loyalists sought to block the motion being taken up. Mr. Rajapaksa himself walked out of the parliamentary chamber before the vote was taken, with his supporters questioning the no-trust motion being taken up with such urgency. This contention could pale before the fact that as many as 122 MPs, in a House of 225, signed a memorandum expressing lack of confidence in his government to the Speaker. The noisy scenes and attempts to disrupt the vote reflected the deep divisions between the country’s main national parties. Mr. Sirisena’s decisions in the last three weeks have been against the letter and spirit of the Constitution, especially the reforms enacted in 2015 to curb the vast powers that come with his office. He removed the Prime Minister despite constitutional restrictions on doing so and had another sworn in. He prorogued Parliament to delay the demonstration of a parliamentary majority by Mr. Rajapaksa. On being confronted with the reality that the numbers were stacked against Mr. Rajapaksa, the President dissolved the legislature itself. The House was revived by an interim order from the Supreme Court.
It is now clearer than ever that Mr. Sirisena had needlessly plunged the country into a deep crisis by replacing the Prime Minister without ascertaining the numbers in the House. It is quite surprising that Mr. Rajapaksa, whose political instincts ought to have made him decide otherwise, agreed to be sworn in solely on the premise that he could induce crossovers. With these two leaders smarting under the setback in Parliament, it is difficult to consider the latest development as the end of political uncertainty. Mr. Sirisena needs to appoint a new Prime Minister immediately, but is averse to Mr. Wickremesinghe returning to that office. He had earlier indicated that he offered the post to two other members of Mr. Wickremesinghe’s United National Party, but had to appoint Mr. Rajapaksa as they had turned down the offer. It would be untenable if he lets Mr. Rajapaksa continue as a lame duck Prime Minister by again invoking his powers to prorogue the House. It is time that Mr. Sirisena, who was elected on a promise of political and institutional reform, showed some statesmanship and found a way to work with Mr. Wickremesinghe again. It would be unwise for him to further exacerbate the crisis. He would do better to turn the page and focus on problems such as Sri Lanka’s bleak economic situation and unresolved minority concerns.
Structural reforms are needed to bring accountability to the credit rating industry
After the IL&FS crisis, the Securities and Exchange Board of India is now trying to increase the level of scrutiny on credit rating agencies that failed to warn investors about it. SEBI has come out with new guidelines to improve the quality of disclosures made by credit rating agencies. According to the new norms, credit rating agencies will have to inform investors about the liquidity situation of the companies they rate through parameters such as their cash balance, liquidity coverage ratio, access to emergency credit lines, asset-liability mismatch, etc. Further, rating agencies will have to disclose their own historical rating track record by informing clients about how often their rating of an entity has changed over a period of time. SEBI has been working hard to improve transparency and credibility among rating agencies for some time now, including through a circular issued in November 2016 calling for enhanced standards for rating agencies. But the latest disclosure norms seem to be a response to the IL&FS defaults and the ensuing crisis. While rating agencies already make at least some of these disclosures one way or the other, mandating the formal disclosure of these facts is still welcome. The ready availability of information can help investors make better decisions.
But the latest regulations can only help to a certain extent as a lot of the problems with the credit rating industry have to do with structural issues rather than the lack of formal rules. The primary one is the flawed “issuer-pays” model where the entity that issues the instrument also pays the ratings agency for its services. This often leads to a situation of conflict of interest, with tremendous potential for rating biases. Second, the credit rating market in India has high barriers to entry, which prevent competition that is vital to protecting the interests of investors. This is not very different from the case in many developed economies where rating agencies enjoy the benefits of an oligopoly. Better disclosures can increase the amount of information available to investors, but without a sufficient number of alternative credit rating providers, quality standards in ratings will not improve. It is thus no surprise that even after repeated ratings failures in their long history, credit rating agencies continue to remain and flourish in business. Structural reform should aim to solve another severe problem plaguing the industry, which has to do with rating shopping and the loyalty of credit rating agencies in general. Rating agencies will have to come up with lucrative business models that put the interests of investors above those of borrowers. Such a change requires a policy framework that allows easier entry and innovation in the credit rating industry.