4 December, 2020

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Appoint A Pro Bono Advisory Council To The Monetary Board!

By Hema Senanayake

Hema Senanayake

Hema Senanayake

A new Governor to the central bank would be appointed soon. I am not sure who he or she is going to be. But what I am sure is that if the new governor thinks that this is a job he can do fairly easily with currently serving members of the Monetary Board and top bureaucrats of the institution and with the help of IMF economists then he or she is mistaken. Many economists and interested intellectuals including many lay readers on the subject have awakened to this truth now.

One of the readers of Colombo Telegraph, commenting on one of my recent articles had observed that given the mess … now entrenched in the Central Bank, it would need someone with extra-ordinary ability to be appointed as the governor. The extra ordinary ability which he was referring must be about the theoretical and practical know-how in regard to managing the country’s monetary infrastructure with a view to achieve the best possible economic growth for the wellbeing of our people.

Assuming that a new governor would be appointed to the central bank, in my view for the most responsible job in our governmental system, I invite him to think outside the box through which he may be able to develop the expected extra-ordinary ability. In order to think wisely and outside the box he may need to listen to some near extra-ordinary intellectuals who have submitted their analyses relentlessly in the recent past in order to put the central bank on correct path. Those people think outside the box and work outside the establishment.

As such I would propose that the government must immediately appoint a pro bono advisory council to the Monetary Board under which the Central Bank functions as its operational arm. This kind of advisory council exists even in the United States. It advises the Federal Reserve Board which is equivalent to our Monetary Board. The said advisory council is named as The Federal Advisory Council (FAC). Its function is defined as follows: “FAC, which is composed of twelve representatives of the banking industry, consults with and advises the Board on all matters within the Board’s jurisdiction.” (Official website, Federal Reserve)

Such a council, possibly with a fewer number of members, is badly needed for Sri Lanka. Yet, this must be a pro bono council and this is important due to two reasons. First, some serious economists with integrity do not want to get remunerated by political masters. Secondly, when the council is on pro bono basis there won’t be any unqualified friends of politicians who would be interested to get appointed. I believe, there are qualified Sri Lankan economists with intellectual integrity who could be appointed for the council.

I am serious on this suggestion. Why? Forget about bond scams, yet the central bank has been at low ebb professionally in managing monetary infrastructure and advising on fiscal policy to the government. Let me justify my argument with citing just two real examples. One example is to prove the weaknesses of existing system or the establishment which weakness we want to eradicate by appointing a pro bono advisory council to the Monetary Board. The other is to prove the lack of economic wisdom on the part of IMF economists so that if anybody thinks that IMF economists can advise us accurately then he or she might understand that such thinking is not close to reality.

Example 1:

The new government wanted to increase salaries by Rs. 10,000/=. The IMF did not support it and warned that such an increase of salaries would not be a prudent idea as it could badly affect to the foreign exchange reserve levels. IMF’s view in a way was very accurate but not all-out true. But anyway the government did increase salaries. I supported the government’s move but opined that the central bank must suitably contain the growth of a certain parameter known as “credit money” in the monetary system. If the central bank did it, then there would not have had severe bad repercussion on the nation’s current account and as a result on foreign exchange reserve levels too. Readers might well observe that the above were two competing propositions. As far as I know, the Central Bank has had no specific idea rather than meekly supported for the salary increase. The crisis hit immediately. Within a few months after increasing salaries, this crisis situation was documented by IMF in September 2015, as follows:

“The increase in consumer spending created by the sharp rise in public wages and salaries has also contributed to a sizeable increase in imports of consumption and other goods—more than offsetting savings from lower oil prices. The resulting deterioration in the nonoil trade balance has contributed to persistent downward pressure on central bank foreign exchange reserves…” (IMF Press Release No. 15/427, September 18, 2015.)

In simple language IMF says that salary increases contributed the reduction of foreign exchange reserves. Concerned Sri Lankan economists foresaw this, as was done by IMF, but urged the central bank to contain the growth of “credit money” in the monetary system in order to prevent sharp depletion of foreign exchange reserves after salary increases. The Central Bank must have acted proactively but did not.

However, depletion of foreign exchange reserves created more crises for the entire monetary system and for the new government. Rajapakse’s borrowing was not good. But even if Rajapaksa had not gone on borrowing spree, this new weakness arose from the action of the new government as was documented by IMF. But it was a crisis only the central bank could have prevented happening, if it worked outside the box but under a prudent theory.

As was pointed out above, when the current account deficit increased, foreign exchange reserves depleted heavily and as a result the government has to borrow extensively in foreign currencies, mainly U.S. dollars. This was quite evident when the government borrowed dollars from India over the currency SWAP agreement signed by and between Sri Lanka and India. Currency SWAP agreements are signed to promote bilateral trade through the use of domestic currencies of partnering countries without using U.S. dollars. It was not a mechanism to borrow money in dollars. But Sri Lanka did it. Still this was not sufficient.

The central bank’s next solution was to float the rupee and Arjuna Mahendran hailed the decision declaring that the market forces would decide the value of rupee hence forth. This was a very unprofessional statement from the Governor. Please read the next point carefully. If the rupee’s value which is being determined by market forces, could have solved the current account problem then the same result could have obtained by containing the domestic credit growth without floating the rupee.

Yet, I know even Arjuna might agree with my point but he would argue that the central bank has no enough policy tools to do it other than increasing what is known as Reserve Ratio if you do not want to increase the rate of interest. The Monetary Board kept the rates steady for a while but increased the Reserve Ratio by a fraction. I continued to argue that the central bank’s approach was very traditional and the measures taken would not bring the necessary stability to rupee. I pointed out that new theory and new approach are what we need in this period of time.

Example 2:

However, IMF agreed with the decision to float the rupee or the Central Bank did it on the advice of the IMF. In either case, since IMF backed its decision, the central bank got a new strength to convince the President and the Cabinet about their decision and they did it. Even middle level political leaders like Sujeewa Senasinghe supported for a “floating rupee” which is terribly bad in attracting foreign investors. But I will show you that we cannot count on IMF economists for prudent monetary theory and its application. Please, read the following carefully.

In December 2001, Argentinian economy plunged into a devastating crisis. IMF economists had no clue about it until it happened. Country’s output reduced drastically and unemployment hit more than 20%. In a subsequent report IMF admitted it and says that, “These events have raised questions regarding the country’s relationship with the IMF because they happened while its economic policies were under the close scrutiny of an IMF-supported program.” (The Role of the IMF in Argentina, 1991-2002, Issues Paper/Terms of Reference for an Evaluation by the (IEO). Interesting! Isn’t it?

This is why, I mentioned at the beginning that if any new governor appointed to the central bank thinks that he can do the job easily with IMF economists it is not a realistic idea. From the previous example you may easily understand that as to how the official economists within the establishment have blundered. Simply they do not expand their horizons.

In view of above I earnestly suggest that a pro bono advisory council to the monetary board must be appointed as early as possible. It will surely strengthen good-governance (Yahapalana) government with no extra cost. However, if the Monetary Law Act does not provide for the setting up of such council, then the President must constitute the said advisory council under him.

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Latest comments

  • 4
    0

    Over the past 50 years, economists worldwide have been more wrong than right about all matters related to global financial crises. This hero worshipping of economists by the author needs to stop. There is a decent enough economist now in place as governors, with several others. That said, provided the monetary board is comprised of individuals with management experience (not the current crop of OL failed chaps) then having a few economists in purely advisory capacity is fine. Perhaps Hema Senanayake will be up to the job, whoever he is.

    • 2
      2

      Hema Senanayake

      “A new Governor to the central bank would be appointed soon”

      They already appointed,a candidate with a Ph.D. in Economics.

      The Question is why did it take so long?

      Was it because the Average IQ of Sri Lankan population is 79, and the politicians are of average or below average intelligence, and it is hard to find a qualified candidates with enough intelligence to fill the position even with a standard deviation of 15?

      • 2
        1

        Amarasiri, You are too obsessed with IQ. That is not the only thing important in life!!

        • 1
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          Nimal

          “Amarasiri, You are too obsessed with IQ. That is not the only thing important in life!!”

          Amarasiri did not say that IQ is the only factor, but more of the important factors. That is one the factors, where there is a good correlation between the wealth of Nations and the ability of the populace to accept democracy. We have to accept the supporting data. After all, the Earth Spins on its own Axis, and orbits the Sun, despite what the Ancients and the Catholic Church claimed.

          IQ and the Wealth of Nations

          For 104 of the 185 nations, no studies were available. In those cases, the authors have used an estimated value by taking averages of the IQs of neighboring or comparable nations. For example, the authors arrived at a figure of 84 for El Salvador by averaging their calculations of 79 for Guatemala and 88 for Colombia. Including those estimated IQs, the correlation of IQ and GDP is 0.62.

          https://en.wikipedia.org/wiki/IQ_and_the_Wealth_of_Nations

          National IQ Scores – Country Rankings

          The intelligence scores came from work carried out earlier this decade by Richard Lynn, a British psychologist, and Tatu Vanhanen, a Finnish political scientist, who analysed IQ studies from 113 countries, and from subsequent work by Jelte Wicherts, a Dutch psychologist.

          http://www.photius.com/rankings/national_iq_scores_country_ranks.html

      • 4
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        Nirmalan Amarasiri

        IQ has repeatedly been proven to be inaccurate and a myth.

        http://www.telegraph.co.uk/news/science/science-news/9755929/IQ-tests-do-not-reflect-intelligence.html

        • 3
          1

          Exactly…the world has moved away from IQ!

          • 0
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            Nimal

            “Exactly…the world has moved away from IQ!”

            … Due to Political Correctness.

            But the African countries are at the bottom , and low IQ is one of the factors. Of course one can cite Western Colonialism and and the Tribalism as other factors as well.

            In Search of a High IQ African Population – Do Africans Really Have an IQ of 70?

            https://www.youtube.com/watch?v=RxAhwYoZQKU

        • 0
          0

          Low IQ

          “IQ has repeatedly been proven to be inaccurate and a myth. “

          Including those estimated IQs, the correlation of IQ and GDP is 0.62.

          https://en.wikipedia.org/wiki/IQ_and_the_Wealth_of_Nations

          IQ and the Wealth of Nations

          Published on Nov 30, 2014
          IQ and the Wealth of Nations is a 2002 book by Richard Lynn, Professor of Psychology, and Tatu Vanhanen, Professor of Political Science . The book argues that differences in national income (in the form of per capita gross domestic product) are correlated with differences in the average national intelligence quotient (IQ). The authors further argue that differences in average national IQs constitute one important factor, but not the only one, contributing to differences in national wealth and rates of economic growth. Critical responses have included questioning of the methodology and of the incompleteness of the data, as well as of the conclusions. The 2006 book IQ and Global Inequality is a follow-up to IQ and the Wealth of Nations by the same authors.

          https://www.youtube.com/watch?v=L4OmpTVSyHY

          Why Your Nation’s IQ Matters | Garett Jones and Stefan Molyneux

          https://www.youtube.com/watch?v=Zsh_b70NSFQ

          In Search of a High IQ African Population – Do Africans Really Have an IQ of 70?
          Published on Apr 14, 2013
          J. Philippe Rushton takes a trip to South Africa, to confirm if black Africans really do have an average IQ of 70.

          https://www.youtube.com/watch?v=RxAhwYoZQKU

          Top Ten Countries with the Highest IQ!!!

          https://www.youtube.com/watch?v=MFGgO8MFfX8

          Racial differences in IQ scores

          https://www.youtube.com/watch?v=zd86NK4GKWE

          • 2
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            Nirmalan Amarasiri

            So your entire raison d’etre has been based on some spurious correlations by some hack academics whose findings have been completely discredited?

            see here: http://skepdic.com/iqrace.html

            You’d have thought if these guys were so great they could at least be hired by an university with a better reputation than the non-entity university of ulster!

  • 0
    2

    Well….Mahandran served his term to screw all Sinhala-Buddhist politicos off their investments. Don’t know what Sirisena and Ranil have in plan for Comaraswamy.

  • 1
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    “Over the past 50 years, economists worldwide have been more wrong than right about all matters related to global financial crises. This hero worshipping of economists by the author needs to stop.”

    I dunno if Cabraal is an economist but the two people who ran the economy for 10 years during Mahinda’s reign, T B Jayasundera and Cabraal ran a very competent show giving the outward impression that everything was hunky dory. It may be a monumental Ponzi Scheme they were running but they ran it very well. Give the devils their due.

    Previously, all SLFP governments’ Achilles heel was the economy. They would come into power, muck up the economy and get thrown out. But Mahinda was smart enough to pick the right people to run it. Cabraal was Ranil’s UNP man, the day Mahinda got the opportunity to contest for the presidency he drove up to Cabraal’s house and asked him to join him! Give the rascal his due; Mahinda knows his onions.

    He had the vision thang!

    Only if Mahinda wasn’t a rouge, a thief, a swindler, a murderer, a deceiver, a waster, a liar …………………………………

    • 0
      0

      “Only if Mahinda wasn’t a rouge, a thief, a swindler, a murderer, a deceiver, a waster, a liar ………………………………… ” Mahinda would have never been made a president by us Sri Lankans – dimwits.

  • 1
    0

    What you require is not an advisory board but a properly constituted monetary board.

    The appointees are political and unfortunately sone of them have no clue about fiscal and monetary policy and common sense.

    Also some of the deputy governors and assistant governors are well below par and the process of simply promoting due to seniority should be stopped. The previous regime started the nonsense of having three deputy governors and about 7-8 assistant governors and it has messed up the system. Very few of them have a good economics or finance or related background.

  • 1
    0

    ” The new government wanted to increase salaries by Rs. 10,000/=. The IMF did not support it and warned that such an increase of salaries would not be a prudent idea as it could badly affect to the foreign exchange reserve levels. IMF’s view in a way was very accurate but not all-out true. But anyway the government did increase salaries. I supported the government’s move but opined that the central bank must suitably contain the growth of a certain parameter known as “credit money” in the monetary system. If the central bank did it, then there would not have had severe bad repercussion on the nation’s current account and as a result on foreign exchange reserve levels too. Readers might well observe that the above were two competing propositions. As far as I know, the Central Bank has had no specific idea rather than meekly supported for the salary increase. The crisis hit immediately. Within a few months after increasing salaries, this crisis situation was documented by IMF in September 2015, as follows:

    “The increase in consumer spending created by the sharp rise in public wages and salaries has also contributed to a sizeable increase in imports of consumption and other goods—more than offsetting savings from lower oil prices. The resulting deterioration in the nonoil trade balance has contributed to persistent downward pressure on central bank foreign exchange reserves…” (IMF Press Release No. 15/427, September 18, 2015.)

    In simple language IMF says that salary increases contributed the reduction of foreign exchange reserves. Concerned Sri Lankan economists foresaw this, as was done by IMF, but urged the central bank to contain the growth of “credit money” in the monetary system in order to prevent sharp depletion of foreign exchange reserves after salary increases. The Central Bank must have acted proactively but did not. “…………………

    Haa haa… Hema senanayake tries to be “mangpora” by trying to theorize bits and pieces of economy. But what about the overall picture which RW has to address? State employees for years and years had undergone great economic and consumerism pressures and with the historical salary increase these vented some of those pressures. Even though these was some pressure on reserve money that salary increase provided some oil to the stagnating economic machinery. This is the way UNP works out its economic strategies based on free market policy whereas Hema is advising outdated MARA typed controlled economic policies. The origin of the bond scam too emanates from this attitude of Hema et al. Cabraal and MARA had hitherto suppressed and controlled the economy, like in Russia, in the aspects of economy like interest rates, pegging of dollar, availability to credit money to the public etc. They made the state entity a more important entity over the public entity and their financial interests. So when AM floated the Rupee value the Cabraal+MARA+Hema+et al combination pegged dollar skyrocketed! I am flabbergasted these people including Hema did not accuse Arjuna for leaching trillions of rupees out of the country by way of increased amounts of rupee value for debt servicing and importation as a result of floating the Rupee! According to their theory the bond scam is the same as floating the rupee where in both occasions government had to incur more rupee value in its transactions. In the bond issue too the CB has allowed the market to determine the interest rate just as allowing the market to determine the rupee value against dollar. It is this corrective adjustment to Rajapaksha pegged economy that they translated as bond scam!

    We would like to hear from Hema of a system designed to prevent insider trading because it is a scandal that affects economies in the world. Instead of levelling allegations against someone about insider trading if property safeguards are in place built into the system it is easy to manage the economy smoothly.

    • 1
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      We have no real idea who Hema is or what qualifies him to write these articles. Perhaps he is a former central bank employee wishing he had stayed on and could possibly have got a political appointment to high places. One thing is clear is that he is fond of the repressive branch of economics practiced by PBJ and the cooking of the books practiced by the accountant cabraal, who did not even know to calculate the future value of a bond, as proved by the independent Verite research who destroyed his argument about a bond scam involving perpetual treasuries, before it was revealed his own sister was a board member of the holding group and thereby was somewhat liable for its activities even if it didnt personally benefit her.

  • 1
    0

    The current monetary board comprises the governor, respected Dr. R.H.S. Samaratunga and career central banker Mr. Jayatissa. The lady Mrs. Ramanathan is a senior legal professional, who is likely in place to handle interpretations of the relevant Acts of parliament. Now that the legal department of the central bank (that was unceremoniously scrapped during the MaRa regime) was reconstituted by Arjuna Mahendran, there may not be a need for such a person on the board. I have no idea what a former tea broker in C. Perera is doing on the board but I assume it was a temporary appointment. It must be the latter with which Hema Senanayake seems to have a massive grudge against, and I assume the board will soon be reconstituted with a mix of industry professionals and academics. In the mean time, we will have to keep reading these grudge columns by the nondescript Hema Senanayake, who as far as I know has never run any organization in Sri Lanka, and has no credibility to be issuing such condemntations! As there is nothing I can find about him online except some economics book that does not seem to have been given two second of thought by any academic, I can only surmise that he is someone who formerly worked at the central bank and was shafted. Until the CT sees it fit to at least ask him to carry a byline introducing himself and why we should take him seriously, I suppose we will have to carry on either reading his moaning or expect him to step up to the plate and do something about it.

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