By W.A Wijewardena –

Central Bank being hit by two disasters

In a recent conversation, a top central bank officer mentioned to this writer, partly in jest and partly with seriousness, that the Central Bank had to face two disasters in the recent past. One was the ‘bomb explosion’ in front of the Central Bank building in early 1996. The other was the ‘bond explosion’ within the Central Bank building in early 2015.

The bomb explosion had brought the bank’s operations to a complete halt, posing a serious threat to its reputation. The bond explosion had damaged the bank in the reverse order: first it had dented the bank’s reputation and then made it legally non-functional by converting it into a headless institution. This is because the law does not provide for an acting arrangement for the Governor when he is in Sri Lanka. As such, the forced leave of Governor’s absence is not recognised by law and all decisions made in the bank without him being present are subject to be challenged in courts of law.

Bomb explosion causing extensive damage to the bank

The first disaster faced by the Central Bank, namely, bomb explosion, was the creation of certain destructive forces outside the bank. They hit the bank when it was least prepared so that they could cause the maximum destruction to it.

For a while, it seemed that they had achieved their objective. The bomb explosion destroyed the Central Bank building, its IT system and practically all its records. In addition, it paralysed nearly a half of its workforce by taking the precious lives of some 41 officers and seriously injuring about 1000 workers.

Even those who had survived the bomb explosion had been mentally traumatised needing constant outside help to bring normalcy to their life. To the outside world, all the evidence indicated that the bank had been destroyed beyond redemption. This was bad reputation for the Central Bank which is a vital institution in the national economy.

Bond explosion is worse than Bomb explosion

The damage done by the bond explosion is not visible to the naked eye as was in the first disaster. But it is far worse than the bomb explosion since it has taken the reputation away from the bank in a single stroke.

The Central Bank, over its 65 years of existence, had not been black-marked in public by such a serious scandal. For a central bank, its reputation is the best asset it has. If it is compromised, it would be difficult for the bank to regain the confidence which its stakeholders have reposed in it. These stakeholders should not be treated lightly because they all are involved in the national economy’s lifeline, namely, funding and financing of its activities. Stakeholders outside the country such as IMF,

World Bank, ADB, global investors and foreign central banks and governments rely on the country’s central bank for correct economic information, internal governance practices and safeguard of the rights and interests of foreign lenders.

The domestic stakeholders, namely, the public, accepts the money issued by a central bank not because it is backed by a Government order but by the trust they place in a central bank. This was analysed by this writer in a previous article in this series titled ‘Principles of Central Banking 1: Why should people place trust in central banks?’

The article argued that trust “depends on the integrity, professionalism and true adherence to the governance principles by those who run central banks” Reputation is built on these three pillars and if any pillar is damaged, so will be the reputation. Thus, any dent in reputation, however-much it is trivial in the opinion of those who run central banks, is a matter of serious concern by all these parties.

Learning outcome from bomb explosion

It is therefore useful to have a re-look at how the Central Bank managed to build its reputation after the bomb explosion in 1996.

The bomb exploded in early morning when the Fort area, the financial heart of the country, was at its busiest. Within minutes, all the buildings surrounding the central bank were on fire. It was a ghastly scene with the injured being ferried by people who were also bleeding all over for immediate medical care.

Everyone in the vicinity seemed to be running for safety. Even after two days, the central bank building was emitting rounds of smoke into the air showing that it was still not accessible for any rescue operation. The outside world would have discerned that the Central Bank had in fact ceased to function. But this was not the case.

Location of the bank in alternative location

The Governor of the Central Bank, A.S Jayawardena, known as AS to the market, appeared on national TV on the same day night and assured the public that the bank would start its operations in an alternative location immediately. He said that terrorists could destroy the central bank building but not the morale of its employees.

Hence, the terrorists had failed to achieve their objective. This was reassuring enough for the bank’s stakeholders who had feared that the Central Bank had completely been destroyed by the terrorist attack. True to his word, the bank started its operations on the following day at its Staff Training College at Rajagiriya. All the senior officers were summoned to Rajagiriya and a staff meeting was held to identify the urgent work to be done and decide on how the bank should continue its normal operations.

It was pointed out that certain foreign and local debt repayments had fallen due and they cannot be postponed even for a single day without compromising the reputation of the bank. It was unanimously decided by the senior management of the bank that the debt repayments should be honoured forthwith because the bank should in no way compromise its reputation. This staff meeting was followed by two other important meetings chaired by AS. This writer had the opportunity to be present at both these meetings.

Support pledged by commercial banks

The first was a meeting with Chief Executive Officers of all the commercial banks. The banks were instructed to make an estimate of the currency held by them in their vaults and ensure that there would not be a shortage of currency in the market. That was because any shortage of currency would have been a serious dent in the reputation of the bank and it should have been avoided by all means.

The Central Bank which could not open its vaults immediately too ran into a currency shortage for making numerous payments it had to make.

On this count, the Bank of Ceylon, the largest and the most stable commercial bank, offered a credit line to the Central Bank so that the bank could make its immediate payments without losing its reputation. This was a rare occasion in which the Central Bank, the banker to commercial banks, had to rely on a commercial bank to settle its payments but it was necessary to assure the public that the Bank had not been destroyed as targeted by terrorists.

Similarly, the People’s Bank offered its services to disburse funds and receive repayments under the Bank’s development credit schemes which had been funded by many donors including the World Bank and ADB. Thus, funding flows to development projects continued without any interruption. Both the Bank of Ceylon and the People’s Bank came forward to assist EPF to receive contributions from employers and make refunds to members. Thus, Governor Jayawardena was able to marshal the needed support of all commercial banks to manage the financial economy without interruption.

Convincing the media is a challenge but a must

The second was a media briefing that was attended by both the local media and all the major international media agencies that had a presence in Sri Lanka. This was the opportunity which AS used to communicate to the bank’s stakeholders that the bank was not dead, it had started to offer its services through alternative methods until it would get back to normalcy and it would soon restore normalcy as desired by its stakeholders.

The media, exercising their right to extract all the information to keep their respective audiences informed of the true status, were very critical and posed scathing questions to Governor and the senior officers of the bank.

Their questions were particularly directed to ascertain whether there was any cover-up of the true damage caused to the bank by its senior officers. This was in fact a testing of the maturity and experience of Governor Jayawardena who was a career central banker, a former Finance Secretary and an international civil servant.

Prior to the media briefing, the senior management of the bank had participated in a crucial staff meeting and a meeting with CEOs of commercial banks. Hence, they were privy to what was happening and therefore could meet the press with one voice. That was important to quell the suspicions of the media-personnel. Thus, the media briefing was successful in communicating the bank’s position to its stakeholders.

Clarity and transparency in central bank communications

What Governor Jayawardena demonstrated was that central bank’s communication policy was important in establishing its reputation among the stakeholders. The bank should not have any fear of coming before the media and explaining its position to the public. If it does not, the media as well as the public start suspecting that there could be some underhand dealings in the Central Bank which the bank attempts to conceal from the public.

The principles and the ethical ground which the Central Bank should follow when communicating with the public were discussed by this writer in an article titled ‘What and how should central banks talk?’ in this series.

In this article, it was pointed out that the communication policy of a central bank should be based on three essential pillars. They were the clarity, transparency and predictability of central bank actions. The central bank should be ready to clarify not only what it has done or what it has proposed to do but also any rumour in the market damaging the bank’s reputation. In doing so, it should speak the truth so as to win the confidence of the public. If it does not, it cannot prevent the public from losing their confidence in central bank’s actions. The loss of confidence will erode the reputation of the bank as well.

Team spirit is key to regain reputation

One important contributor to the rebuilding of the Central Bank while preserving its reputation after the bomb explosion was the excellent teamwork displayed by all the senior officers of the Bank. There was healthy competition among the senior officers to do the best for the Bank as it should be in any growing and dynamic institution.

However, when it came to rebuilding and modernising the bank, all senior officers functioned as a single team demonstrating team-spirit in every move they made. Within teams, there were differing opinions expressed by team members. Harbouring differing opinions by staff was encouraged because that culture led to the building of a creative workforce. However, they were debated freely at team meetings allowing the bank to choose the best path for its future development.

Bond explosion has been badly handled

In the recent bond explosion fiasco, it does not appear that the Central Bank has followed a clear communication policy. When the rumour that an insider dealing has taken place in the 30 year bond issue started to spread in the market, the Central Bank had become strangely silent. Its silence then fuelled new rumours that dented the Bank’s reputation effectively. All opposition forces rallied round the rumour and it soon became hot news for the media. While the local market became agitated, the international markets became extremely nervous.

This was further fuelled by the defensive stand taken by the government which had come to power on the pledge of establishing good governance in the country. Thus, the attack made by critics was not only on the alleged insider dealing in the bond issue but also on the type of good governance being promoted by the government.

Hence, the biggest victim of the bond explosion was the long honoured concept of good governance which became a mockery after the inaction of both the Central Bank and the government to listen to the pulses of the people. With the passage of each day, more and more civil society organisations including major political parties are demanding that the Governor of the Bank should take responsibility for the whole fiasco and step down from his position. The action of such political parties provides a fine example that they are correctly reading the pulse of the people. No government can survive if it is unable to read the changing rhythm of the pulse of the people and act accordingly.

It is still not too late to change the course

The Central Bank has been hit by a bond disaster severely denting its reputation in the market. It will not be difficult to restore the lost reputation in the bank if the government and the bank act with full openness and transparency. It is still not too late to change the course that is now leading the bank to a self-destruction, a goal which terrorists had failed to achieve some 19 years ago.

*W.A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com