By Hema Senanayake –
Why the appointment of the Governor of the Central Bank is so important? I kindly invite you to think about it for a little moment before you read this brief essay.
My enlightened view is that, if the country got a competent governor for the central bank, I do not care who is being elected to be the President or Prime Minister of the country when it comes to the issue of the economy and its growth. Why do I say so?
It is because, the governor of the central bank is the only man in our governmental system who can effectively change the total output (i.e. production) and who can create more sustainable employments than the entire cabinet could. Governor is the only single man who can effectively change the nation’s Current Account and Balance of Payment situation on which the stability of our domestic currency the rupee depends and in turn, upon having a stable rupee Foreign Direct Investments would increase. In fact the governor of the central bank is the man who can save the government politically. If economy fails, “good governance government” fails.
Perhaps you might think that Prime Minister Ranil Wickremesinghe has understood the critical importance of the role played by the Central Bank as he proposes that the central bank must be an independent institution. I am sorry, let me call the spade is spade. Administratively, any central bank can be made independent but theoretically and for practical reasons, no central bank can be made independent functionally if a taxation authority which is defined as a government which can collect taxes, does not support it.
The slogan for independent central bank was a catching idea promoted by central bankers prior to the Great Financial Crash of 2008. During this crash, the European Central Bank (ECB) was the only significantly large central bank which was not backed by a taxation authority directly. As a result European Union had to go after IMF in finding solutions for its member states and economies of some member states crashed significantly during the crisis. As far as I know ECB is now looking for some kind of arrangement to get the backing of all taxation authorities of EU. There is a clear technical reason (macroeconomic reason) as to why the central bank needs the backing of taxation authority, but I am not venturing into discuss this point in this brief essay. However, as at now there is no huge outcry for independent central banks, as far as I know even IMF is not interested in that slogan any more but our Prime Minister does. For a moment forget about it.
In regard to Sri Lanka, the true fact is that, if the Governor is professionally competent and if he knows central banking, he could have obtained the necessary independence by earning a reputation for his or her professionalism, as the Monetary Law Act under which law the central bank has been established provides ample legal support if any competent Governor chooses to be independent. But this is not what happened. Instead of fighting for his professional independence, the incumbent Governor has surrendered his independence seeking refuge under the Prime Minister by getting the Central Bank listed under the Ministry of Policy Planning. According to the monetary law act, the Central Bank must be listed under the Ministry of Finance. When somebody’s mind is clouded with shear arrogance that person does not care about even his own integrity. By deviating from what the law says, if Ranil could determine that the line ministry of central bank must be the Ministry of Policy Planning, then some other future Head of the Cabinet might determine that the central bank be listed under the ministry of tourism or whatever: sad state of affairs under the good-governance government.
First, Prime Minister put the central bank under his ministry. Then, he wants to remove part of it elsewhere. According to a recent report published by Colombo Telegraph, the “Cabinet is set to move the Public Debt Department, Exchange Control and control over secondary markets outside the purview of the Central Bank and place them directly under the Ministry of Finance.” This report must be true because Deputy Minister Eran Wickramaratne has mentioned exactly the same opinion recently in an interview conducted by a TV channel. Eran is formerly a CEO of a major development bank. When he himself believes in this kind of nonsense, I have no doubt that the collective wisdom of this government in regard to the central banking is very novice.
Now the government is going to remove certain functions from the central bank. Forget about politicians, so, what does the Governor of the Central bank think about it? Does he support it or oppose it? It is from his answer to this question that we would know as to whether he knows his job well.
Main function of the central bank is to put the country’s monetary infrastructure right, upon which infrastructure the whole physical economy depends. The monetary infrastructure is a very hypothetical system as modern money is not real and in the present system this money is not created only by the central bank but a lot of money known as credit money is created by the country’s banking system too. This is the system that the central bank is supposed to manage in order to put the best possible monetary infrastructure for the country. You may say that the main function of central bank is to execute the monetary policy but when we say so, we (at least the Governor) must be mindful that the central is actually managing a larger nonphysical system in order to achieve the best possible economic outcome for the country.
Can this job be done without having the necessary tools – policy and administrative kind – that could interfere in managing the nation’s current account, Balance of Payment, foreign reserves and having ability to advise on the fiscal policy to the government? No, it cannot. Then, can the central bank manage at least the nation’s current account, balance of payment and foreign reserves rightfully when the government removes the Public Debt Department, Exchange Control and control over secondary markets outside the purview of the central bank? No, it cannot. If the Governor of the Central bank does not oppose to this move, then it proves nothing other than his ignorance to this vital subject. By now, after a fairly long period of doing the job, it is Arjuna Mahendran who knows best as to whether he knows the subject or not. If he doubt about his competence it is best for the country that he inform the government that he is not available for the job after his current term ends at the end of this month. If he does, then it would open an opportunity for the President to appoint a new governor without much problem.
In that event, I may suggest the President to relist the Central Bank under the Ministry of Finance and 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.