Should State banks be privatised?

By Sumanasiri Liyanage-February 11, 2018, 9:51 pm 

Various governments in the last forty years had made many attempts to privatize state banks justifying their decision with implicit neoliberal arguments. However, the strong Ceylon Bank Employees Union (CBEU) flexed its muscles against such attempts so that the government was forced to retreat with the hidden agenda to come up later. The move to privatize state banks and other state-owned institutions is very much consistent with the neoliberal theory that market with private interest working in is the best regulator that would create more efficient and beneficial outcome. We can see the repetition of this argument in almost all the prescriptions of the International Monetary Fund (IMF). However, it refloating of the same argument in more explicit terms shows that we are now entering into a new phase of neoliberalising of the Sri Lankan economy. This phase was defined by Prime Minister Ranil Wickremesinghe in his regular "special" statements as the third phase of liberalisation, the first and second being the reform measures of 1977 and that of 1989. The impression given was that the third would be a full-blown implementation of Washington Consensus (WC) on which IMF and the World Bank wanted each so-called developing countrry to design its economic strategies. So the Prime Minister being a market fundamentalist has insisted that no deviations from the WC be allowed for the sake of the requirements of the national economy and local business interests.

This is clearly indicated in the Budget 2018. Budget 2018 speech informs us: "In line with Vision 2015, we need to undertake bold reforms in factor markets in order to eliminate price distortions and restore property rights in accordance with market principles aiming at promoting faster and sustainable growth. Capital market reforms to capture its full potential are imperative for ensuring high growth …. Without proper ownership of land and property, no country could achieve faster growth ensuring prosperity for all. In this context the country’s land and property ownership issues need a careful and urgent appraisal.The country’s labour demand against the constraints on labour supply requires a closer examination of all areas of the labor market including labour laws, to pave the way forward to harness the productive resources of the economy."

In this regard, Sirisena-Wickremesinghe government has proposed two strategies, namely, (1) "Sri Lanka needs to liberalise and globalize"; (2) "over-dependence on non-tradable drivers" should be reduced. Hence, Sirisena-Wickremesinghe government wants to amend some legislations enacted in the past mainly by the Sri Lanka Freedom Party (SLFP) led governments. It is interesting to note that President Sirisena and his SLFP faction wholeheartedly supported the Budget 2018 and its all substantive proposals. So it is somewhat hilarious for the President to say that the economic management in the last three years was in the hands of the UNP side of the government.

So it is quite clear that the proposal to divest the state banks is not an isolated one but a part and parcel of the larger project of implementation of neoliberal fundamentalism. Besides the general argument for privatization, the government has failed to offer an acceptable justification why the state banks should be privatized. There is no evidence to support that the state banks are loss-making institutions. In fact in 2016, the net profit of the Bank of Ceylon was Rs. 31.6 billion. It has paid to the government Rs. 18,000 million as levy and Rs. 346 million as dividends.The Peoples’ Bank paid to the government Rs. 8,000 million and Rs 316 million as levy and dividends respectively. Justification for privatisation given with reference to Basel Agreement appears to be quite weak as the capital requirement can be easily resolved by alternative means. Hence, we have to conclude that it is the misconceived faith in market operation and the private ownership that leads this government to adopt these policies. However, the government knows very well that the strong trade union in the banking sector will not allow this decision to be implemented. So it should be super coated. The Budget 2018 proposes:

"It is in this context that we will allow the BoC and the PB to raise both debt and equity capital. In raising equity capital the state will not relinquish the controlling ownership, but is willing to allow the divestitures, provided that the depositors and the employees are given the option of becoming shareholders."

In the face of structural reforms and in the context in which the organizations of the lower classes are strong, neoliberal program cannot be implemented like they were introduced and implemented in Chile, so that reforms come creeping like a snake. Hence divestiture begins in the form of handing over share rights to the workers as a first step.

Establishment of state banks

The state sector banks were set up with specific developmental objectives going beyond just facilitating transactions. In 1939, Bank of Ceylon was established as a bank that could play the role of banker to state institutions as well as a banker to local business groups which were neglected by the colonial banking structure. It was nationalized in the early 1960s and at the same time the Peoples’ Bank was formed as a bank especially catering for rural sector and small scale enterprises including co-operatives. In the 1970s the National Savings Bank was set up incorporating existing small savings institutions like post office, savings banks with the aim of increasing small scale public savings. Later some developmental banks were established and without a serious analysis of its consequences those development banks were privatized. If we look at the economic history, it reveals that in many of today’s advanced countries, state owned or controlled banks and financial sector play a role of great importance in the process of development facilitating transfer of scarce capital into sectors that are crucial for development. One of the earliest examples of this was the formation of Credit Foncier and Credit Mobilier in France during Napoleon III time in order for France to face England and to steer its economy towards capitalist development. A similar example can be found in many late-developing countries including in the countries of East Asia.

The needs of these developmental objectives of the state banks remain unchanged notwithstanding the fact that the management of state banks by political henchman of the Ministers had led their function to be deviated from their original objectives.

The yahapalana government is in the process of selling almost everything showing its inability to manage public assets. As the CBEU has correctly stated, the privatisation of state banks is a decision that should not be allowed to be implemented.

E-mail: sumane_l@yahoo.com