By Harsha Gunnasena –
The economy of the country is in dire straits. The President, the virtual King of Sri Lanka does not have common sense let alone knowing of basics of handling an economy. He has the authority of appointing the Governor of the Central Bank who is the Chairman of the Monetary Board, Secretary to the Ministry of Finance who is an ex officio member of the Monetary Board and the three appointed members of the Monetary Board. Governor of the Central Bank is Ajith Nivard Cabraal ( he has resigned now); the Secretary to the Treasury is S.R. Attygalle; and the three appointed members are Sanjeeva Jayawardena P.C. who was appointed in February 2020, Ranee Jayamaha and Samantha Kumarasinghe who were appointed in June 2020.
Prior to that the three appointed members were C.P.R. Perera, Dushni Weerakoon, a veteran economist, who served only one year and A.N. Fonseka a vetaran banker, who served only four years. The term of office of an appointed member of the Monetary Board is six years according to Section 13 and in the event of vacation of office by the appointed member, another person shall be appointed in his or her place to hold the office during the unexpired part of the term of office. It is not clear whether these members have completed their terms of office or whether they were asked to leave since the so-called home-grown solution cannot be implemented with them.
When Indrajit Coomaraswamy left as the Governor of Central Bank in December 2019, he said that Sri Lanka being a middle-income country, we were exposed to rating agencies. Therefore, we should have some kind of relationship with the IMF even if we do not borrow. Sri Lanka would have to borrow annually USD 3Billion to meet the debt obligations and maintain a reasonable level of import. This is the clear path Sri Lanka will have to follow. Otherwise, the country would have to face the Greece scenario which means severe austerity measures.
W.D. Lakshman was the next Governor and he deviated from the path recommended by Coomaraswamy and that was the beginning of the end. Cabraal who became the Governor in September 2021 sealed the end.
Under the Section 16(c ) of the Monetary Law Act, the President may, on the recommendation of the Minister in charge of the subject of Finance, remove the Governor or an appointed member from office, if he has done any act or thing which, in the opinion of the President is manifestly opposed to the objects and interests of the Central Bank.
The objects of the Central Bank were defined in Section 5 of the Act. Those are (a) economic and price stability; and (b) financial system stability, with a view to encouraging and promoting the development of the productive resources of Sri Lanka.
This is how Price stability is defined on the Central Bank website.
“Price stability or stable prices means low inflation. Experience has shown that the economy performs well when inflation is low and is expected to be low. Interest rates are also low in these conditions… The Central Bank uses monetary policy measures to control inflation.”
Financial System Stability was defined on the website as follows.
“Financial system stability means the effective functioning of the financial system (financial institutions and markets) and the absence of banking, currency and balance of payments crisis.”
There is increasing inflation in the country month by month. The interest rates are lower than the inflation rate. Central Bank has not taken adequate monetary policy measures to control the situation. There is also a severe balance of payment crisis which is not remedied causing unprecedented pressure on the government to resign.
Therefore, the conduct of the Monetary Board is manifestly opposed to the objects of the Central Bank. Therefore the Monetary Board deserved to be sacked under the Section 16(c ) of the Monetary Law Act. Unfortunately, the President is incompetent to have an opinion on this as proved by his own conduct. If they have any self-respect, they should resign.
The Governor has resigned. He has not resigned acknowledging the damage he has done. He who is such an arrogant person, same as the person who appointed him, tweeted that he resigned in the context of all the cabinet ministers were resigning. He thinks that he is in the rank of a cabinet minister although there is no provision in the law to give him such a rank.
The problem started with the slashing of the taxes in December 2019, soon after this government came into power. This was a fiscal decision and Central Bank had nothing to do with it. The Central Bank reduced the interest rates. When the treasury bills were put on auction people did not buy due to low interest rate. Then the Central bank had to buy back those treasury bills causing money printing. Excessive money printing caused the present inflationary trend. Both Lakshman and Cabraal did not have this common sense. They were lecturing that it was not the case. Central Bank increased the interest rates marginally but even now the interest rate is lower than the inflation rate which is to be corrected immediately.
Price control of the Rupee started during Lakshman’s time. Cabraal continued it. They thought that the financial system stability could be achieved by controlling the exchange rate. Rupee is at this level due to the lack of public confidence.
Cabraal is a balance sheet economist. He does not know that managing economy is a balancing act. His thinking is one sided. Being an accountant, he focuses on the annual report and the yearend exchange rates and reported figures. That is why he managed to increase the reserves at the yearend of the last year by using manipulative tactics.
We should demand the resignations of the Monetary Board and the Treasury Secretary. Their actions amount to gross negligence in the part of the national economy. I believe that there is no criminal offence since their actions are not punishable under law.
However senior Central bank officers should bear in mind the fourth Nuremberg principle which is the fact that a person acted pursuant to order of his Government or of a superior does not relieve them from responsibility under international law, provided a moral choice was in fact possible to him, although they may not be binding to it.