By Hema Senanayake –
Finally we have a new governor appointed to the central bank. It’s you. After assuming duties you declared that you fear no one in discharging your duties. We, the readers and contributors to Colombo Telegraph eagerly waited for such a person to be appointed as the new governor for the central bank. We urged from the President, “to appoint a Governor who can win greater independence for the central bank by proving his professional wisdom in managing the nonphysical system of monetary infrastructure. Do not believe on guys who would talk about mere executing monetary policy, interest rates, reserve ratio, managing foreign reserves, listing rupee bonds in international markets etc. Trust on a guy who is capable of managing a dynamic hypothetical system flexibly and accurately” (June 19, 2016, Colombo Telegraph).
We hope that we now have found a true professional in you for the position. We may trust you, but still we need to verify as things get going under you. When I say this I am not that much concern about bond scams because it is something which can be prevented pretty easily if you are interested, instead I concern as to how you conduct the monetary policy and advise the government on fiscal policy and other matters on macroeconomics. This is the most important job that you have to do and this is the job that you have to fear no one in carrying it out. Why?
The existing paradigm of central banking is now outdated. In regard to the execution of monetary policy what had worked for years had failed big time in 2008 with the financial meltdown in the United States and Europe. This failure was preceded by the failure occurred in Japan in early 1990s which is still continuing and the virtual economic collapse occurred in Argentina in Dec. 2001. Before the collapse, Argentinian fixed exchange rate system had been considered, including IMF, as a model for all developing countries. After these crises, the world is now left with no proper model for central banking and this is true for developed countries whose domestic currencies are used as international reserve currencies by other developing countries and is true for countries like ours which use some other country’s domestic currency as international reserve currency. So what we practice now can be defined as “ad-hoc” central banking. In this context what you had learnt in regard to central banking in any prestigious university might have outdated by now.
Former Governor Arjuna Mahendran was considered as a mastermind in “ad-hoc” central banking. If you need me to justify my point I may suggest you to read the minutes of the first Board Meeting of Monetary Board after he took reigns of the central bank. In that board meeting occurred on February 23, 2015, the Monetary Board had decided to list Sri Lankan sovereign bonds in Euro Clear Exchange. You may know what does this mean?
As you may know that the most important function of the central bank is to ensure having a credible domestic currency which could penetrate easily and flexibly into any economic produce so as to reveal its value in order to facilitate the exchange of such produce among various economic agents. So, it requires a dependable currency for economic activity. When the foreign exchange reserves began to deplete according to the known wisdom, we cannot have a stable or dependable domestic currency which is the rupee. So, rather than tackling the issue, macro-economically supported by monetary and fiscal policy measures, Arjuna presented a business level solution suggesting to list bonds in Euro Clear Exchange, in order to boost foreign exchange reserves. So, far not a single bond was listed in Euro Clear Exchange – And does this reflect the kind of professionalism exist in the institution?
However, if listing of bonds in Euro Clear Exchange was a serious concern then such hope was dashed when Arjuna decided to float the rupee after a few weeks later. I never argue that the rupee can be pegged artificially to the dollar – and here, I insist the word artificially. Yet, the rupee can reasonably be pegged to the dollar, if we can contain the domestic credit growth. This means if you peg the domestic credit growth at desirable level there won’t be any necessity to peg the rupee to dollar artificially and if you cannot peg the domestic credit growth at desirable level, then there is no method for the central bank to peg the rupee to dollar even artificially. Therefore this is the exact time that you should abandon in continuing “ad-hoc” central banking based on “commonsense.” On the contrary we must look beyond the existing economic paradigm. That is how we can gather new know-how to tackle the issues faced by our country right now.
This is why I insist you that you may look into the true macroeconomic theory and fundamentals (not inflation, price stability, unemployment, growth rate, gross domestic product, etc.) in doing your job. A stable currency is a prime requirement to attract real foreign direct investments. This means you have to begin from nation’s current account and balance of payment. Do not let the politicians in the government to begin from project end. Get them justify their projects by showing firstly, as to how such projects and programs affect the nation’s current account deficit and secondly to the balance of payment. If you do not do this, then we will see that our currency would be further depreciated.
You have specified three concepts; integrity, technical excellence and professionalism, as the guiding principles for you and your staff in moving forward.
Further, you said that, “… if any of you think I am not living up to those principles, please find a way of getting that message to the 15th floor (Office of the Governor).” We congratulate you for those words.
However, you will be judged not by your words but by your efforts in stabilizing the rupee without excessive foreign borrowing and/or without being instrumental to sell national assets to foreign buyers. Thank you.
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