20 June, 2024


Now That Bond Commission Too Has Said It, Govt. Cannot Postpone The Reform Of CB Any More

By W A Wijewardena

Dr. W.A Wijewardena

Resurrecting an old pledge

The Deputy Minister of National Policy and Economic Affairs, Dr. Harsha de Silva, commonly known as Harsha, is reported to have announced the engagement of the International Monetary Fund (IMF) by the Government to amend the present Monetary Law Act (MLA)

MLA is the law governing the operations of the Central Bank of Sri Lanka or CBSL. The areas of amendment, according to Harsha, have been the mandate and scope of the bank, its autonomy, governance and accountability. This is indeed a long felt need which the Government is seeking to fulfil today after sitting on it for three long years.

Bond Commission has suggested CB reform

Even the Presidential Commission on the Issuance of Treasury Bonds, commonly known as the Bond Commission, has recommended that the Government and CBSL should consider whether MLA should be replaced with appropriate legislation which will better suit the present day needs and aspirations of Sri Lanka. However, the Commission has also recommended that it should be done after consulting the stakeholders and after obtaining the expert views on comparable exercises in comparable countries. Thus, obtaining the services of IMF is in order but the Government should go for setting up a mechanism for wide consultation and it should not be tried as a top-down legislation being proposed by a bunch of politicians seeking to better their own positions.

Need for streamlining key appointments to CB

The Commission has specifically recommended that the appointment of the Governor and those of the Monetary Board should be streamlined to facilitate the appointing authority to select suitable persons for the respective jobs. Another recommendation by the Commission has been the need for introducing a code of conduct for the members of the Monetary Board which cover the Governor, Secretary to the Ministry of Finance and the three private members.

The doctrine of trust

In the introduction to the report, the Commission has also highlighted that the Governor, Monetary Board members and officers of the bank are simply trustees functioning on behalf of the people of the country. Say the Commissioners: “We consider that, in these circumstances, that the Governor and other members of the Monetary Board, Deputy Governors and other senior officers of the CBSL hold those offices subject to the ‘Public Trust Doctrine’. They are subject to Public Accountability (p 22).”

The circumstances referred to by the Commission are that CBSL is a public authority, its officers including the Governor and the members of the Monetary Board are public officers and CBSL is an institution of highest importance to Sri Lanka and its people. The position taken by the Commission is accurate since CBSL has been created by society to deliver two public goods, namely, an inflation-free world and a trustworthy financial system. It is unlikely that the private sector could produce them with the same efficiency and efficacy as a neutral and apolitical central bank.

Political masters too should observe trust doctrine

Though the Commission has not said it explicitly, the trust doctrine referred to by it applies to the political masters functioning above the Central Bank as well. In Sri Lanka’s present case, they are the President, who formally appoints the Governor and the Monetary Board members, the Prime Minister under whose care CBSL has been awkwardly placed and the Minister of Finance who is statutorily responsible for the bank.

What it means is that none of these political masters should allow the misuse of central bank funds or powers; in the event they observe such a misuse, they should immediately take action to prevent it. This is because they are the guardians appointed by the people to safeguard CBSL.

President has been the saviour of CB

In this context, the action taken by the President with respect to the alleged bond scams right from the beginning has been compliant with the cherished Doctrine of Trust.

The President on more than one occasion revealed that he was opposed to the appointment of Arjuna Mahendran as Governor of CBSL, agreed to make the appointment after he was given a pledge by the Prime Minister, advised the Prime Minister to remove him when the news of the impropriety on Mahendran’s part broke out, did not give Arjuna Mahendran a second term despite the pressure from the Prime Minister and appointed a special Commission of Inquiry to identify the perpetrators of the bond scam so that appropriate legal action could be instituted against them.

In a coalition government in which the President does not have Parliamentary power, this is the best he could do to observe the Doctrine of Trust.

Legal meaning of doctrine of trust  

This writer in a previous article in this series titled ‘Governor and Board members are trustees and not owners of the Central Bank’ elaborated on the economic aspect of the public trust doctrine as follows: “A trustee has a legal meaning as well as an economic meaning. The legal meaning is that a trustee has to take the same care and caution when he handles the assets of the beneficiaries as when he handles his own assets. In other words, since he does not allow his own assets to perish but prosper, he should not allow the assets belonging to the beneficiaries to decay through negligence but take all measures to enhance their value. In this manner, the trustees of a trust are bound by a legal obligation and that legal obligation is known as ‘fiduciary obligation’ binding them”.

Economic meaning of Doctrine of Trust

“The economic meaning of a trustee too is derived from the legal meaning but it goes beyond that. Economics does not recognise that one can always be successful in his enterprises. He can be a success or a failure depending on how he organises his enterprise and what sort of market conditions he faces.

“Accordingly, in economics, a person would take a reasonable risk in order to make an expected amount of profits. These people in economics are called investors and they differ from speculators. The latter will take excess risk in order to make super or extraordinary profits. Both investors and speculators live in an economy and they are found side by side with each other.

“Society does not expect the members of the Monetary Board headed by Governor to function as speculators. Instead, they should function like investors who know the extent of risk they take and are knowledgeable of the need for introducing risk mitigating mechanisms in running central banks.”

Removing CB from Finance Ministry

When the CBSL was gazetted in 2015, for the first time in Sri Lanka’s history, under a Ministry other than the Ministry of Finance, namely, the Ministry of Policy Planning and Economic Affairs of which the Minister was the Prime Minister, this writer wrote in this series that it was unworkable both legally and operationally.

This is because there was a need for close coordination of both fiscal policy and monetary policy for Sri Lanka to attain macroeconomic stability. Statutorily, it is the Minister of Finance who is responsible for every action of the bank.

New arrangement is unworkable legally and operationally

In this context, the powers given to the Minister of Finance by laws are inalienable. But in the new arrangement, the Governor had to serve two masters and conflicts arising from the two masters would be unavoidable. Hence, the Governor’s job was like that of an acrobat who had to walk on a tightrope carefully balancing every move he makes. The only salutary feature of this arrangement was the ease of bringing a new central banking legislation under the stewardship of the Prime Minister.

Advice to enact new CB legislation

Hence, it was suggested that within the 100-day program, the necessary legislative arrangements should be made to introduce an updated central banking law. For that purpose, it was pointed out that the Government need not reinvent the wheel since there is already a draft central banking law prepared by CBSL in 2004 with IMF technical support. Though the Ranil Wickremesinghe government of 2002-2004 had agreed to enact this law, it could not be done since it was voted out of power in the General Elections held in the middle of that year. The new Government shelved the idea of introducing a new law and it was therefore allowed to be dusted in the central bank archives. It was suggested that the government could retrieve it from the dusting place, update it to reflect the current conditions and enact as a priority-legislation. But nothing happened.

Finance Minister working in the opposite direction

When the new Government was formed after the General Elections in August 2015, making the same mistake, CBSL was gazetted under the Ministry of National Policy and Economic Affairs. The Prime Minister delivering the Government’s economic policy statement in Parliament in November 2015 promised to give autonomy to CBSL. However, what his Minister of Finance Ravi Karunanayake did was the opposite. Through various schemes he tried to undermine the independence of the CBSL, prompting this writer to warn the public of the emerging ominous development in an article under this series.

The main area of contention was the Finance Minister’s alleged attempt at grabbing the powers of the Monetary Board to operate the country’s national payment system and supervise and regulate the financial system.

Finance Minister’s accusing CB

In the meantime, in a public forum on the Budget 2017, the Minister Karunanayake had in a harsh tone accused the Central Bank of “failing on many fronts miserably”

His charge had been that the bank had deviated from its responsibilities under the law and allowed itself to be politicised. In his view, the Central Bank should confine itself only to its regulatory and monitoring functions without “dabbling in how to run the country”. Many activities done by the Central Bank are undesirable and by implication, they have impeded the action taken by the Government to put the economy on the right footing. Hence, along with the restructuring the Central Bank, all other pertinent legislations like the Banking Act and the Payments and Settlement Act would also be “revolutionised”. The Minister, without giving further details, had elaborated that the restructuring process would be spearheaded by both the President and the Prime Minister, implying that it is an action initiated by the very top of the government.

Attempt to erode CB independence

The tone of the Minister implied that the Government was to reduce the independence of the Central Bank and make it another department in the Ministry of Finance. If done, this would be a disaster and would go against the accepted principles of central banking. The loser at the end would be the Government and the people of the country.

This writer in another article in this series, while upholding the Government’s desire to reform the Central Bank, warned that it should not erode its independence in that exercise. Giving up the powers they enjoy would be a hard choice for politicians but the article argued it would help Sri Lanka to attain its objective of becoming a rich nation within a generation. That is because global experience has shown that when the country’s central bank enjoys independence, it has been more beneficial for the country to deliver prosperity to its people on a sustained basis.

Hence, the article under reference highlighted that a far-sighted government would choose to make its central bank independent of political patronage and influence. It is the biggest sacrifice which it can make for the sake of people.

Since the present government is dedicated to establishing a good governance system in the country, it was pointed out that it would not be difficult for the Prime Minister to make that hard choice, despite the pressure coming from his Cabinet colleagues to the contrary.

Minister of Finance ridiculing his own Governor

But the rift between the Minister of Finance and CBSL continued, worrying both the international community and local investors. There was a vocal battle in which Finance Minister Karunanayake is reported to have criticised the Governor of the Central Bank and its senior officers in public. Apparently dismayed by Governor Indrajit Coomaraswamy’s open and frank assessment of the state of the economy in the address he delivered when launching the Central Bank’s Road Map for 2017 and Beyond in early January 2017, it was reported that the Minister had equated the Governor to a hospital attendant who had helped the previous administration to send the economy, the chronic and acute patient, to the intensive care unit or ICU of the hospital.

The Minister is reported to have said that it was he who had taken the patient out of ICU. But the performance of the economy in 2017 has proved Coomaraswamy correct and it was most unfortunate for the Ranil Wickremesinghe Government not to hear his warning and take remedial action.

Failed attempt at stabilising exchange rate by Minister of Finance 

The Governor’s right to speak the truth and how it would help the government to build a sound economy were analysed by this writer in a previous article in this series (available at: http://www.ft.lk/article/590141/When-a-Governor–speaks-like-a-Governor—– ).

Although Minister Karunanayake had pacified the Governor, later calling him a “good soul”, he had at the same time castigated two or three senior officers of the bank for conspiring to depreciate the value of the rupee in international markets, a move to embarrass the Government in his opinion. He had even threatened to reveal the names of these officers in the days to come (available at: http://www.dailymirror.lk/article/Ravi-K-vows-to-reveal-names-of-Central-Bank-saboteurs-busting-rupee-122195.html).

Minister Karunanayake had, according to the report, vowed to stabilise the exchange rate which was under pressure for depreciation within two months. As expected, the magic of Minister Karunanayake did not work. The rupee continued to depreciate and eventually when the problem became acute, the IMF had to be called to rescue it through a special funding arrangement.

Favourable nexus to reform CB

This unsavoury battle between Minister Karunanayake and the CBSL ended only after the appointment of Mangala Samaraweera as Finance Minister in mid-2017. Unlike his predecessor, he did not have any ambition to subdue the CBSL.

Hence, there is now a favourable nexus within the Government that would help Harsha to attain his goal. The nation has an obligation to support this move.

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

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Latest comments

  • 0

    I do not know about finance. I think the correct approach is the Central Bank should be independent and when there is a Need it should address an all party finance committee and not one ministry or governing party committee. In Sri lanka, that is hard. as there 64 three wheeler parties. what ever it is Maithripala is showing serious lack of leadership. It shows his 50 years of experience also was just like the 40 years of ranil. If PResident doe snot have powers why he doe snot declare emergency. Ranil should not be trusted. Every thing he does is political and to sabotages chances of opponents. In this case PResident included.

    • 3

      Dr. Wije, Thanks, but seriously, why don’t you just say that Ranil should be impeached if he does not resign as chief architect of the Bond Scam at CB?!
      Also.Foot Note Man Harsha is implicated in Bond Scam, and NOT the solution. So too IMF. Today there is legalized financial corruption in the world due to IMF policies to benefit Global 1 percent. Check out the OXFAM report on how the Global 1 percent controls more than half the world’s wealth, and then the Debt crisis in SL.

      Sir, the accounting company Price Water House was recently banned from India due to the Satyam scam and FAKE ACCOUNTING PRACTICES. Recall Arthur Anderson and Enron. Today we have Fake Debt, Fake Accounts and Fake experts and Fake accounting companies piling pushing counties like Greece and Sri Lanka into DEBT TRAPS so that these country’s economies and foreign policy may be taken over by Global Capital and the Trump Deep State, with help from Japan, which is piling on loans and debt for Highways construction and selling Japanese Cars in SL today. IMF should have been be tracing funds looted from Lanka by corrupt rich and kept in Singapore, Dubai, US Chian etc, and asking for good governance at Central bank long ago, rather than imposing new taxes on the poor and middle class people to pay of the massive debt run up by corrupt politicians..
      So, dear Dr. Wije. IMF’s fake experts and darling Harsha are not the solution to the Debt trap and Bail Out Business in Sri Lanka today.

      • 0

        Dead on Dodo. Poor Dr. Wije.. who is and old school Economist, still cannot believe that the Global Financial System and governance institutions are themselves corrupt at the core, and part of the problem of financial crime and economic inequality.
        Corrupt politicians and their business cronies are getting richer and greedier in Lanka, as in the rest of the world, while the majority of people and the environment which is being stripped , suffer. This is the “international development model” set up by corrupt global financial governance system controlled IMF and WB. Also, ADB which is owned and operated by Japan never talks about Public Transport though it offers all sorts of unsolicited policy advise like IMF and WB!. This is why China set up its own AIB to pursue Chinese interests. Meanwhile, common people led by stupid and corrupt politicians in Lanka are literally at sea as the current global Financial Architecture legalizes money laundering and protects the secret off shore bank accounts of corrupt politicians and tax evading Corporates. This economic system is called “Trickle up”, not “trickle Down” !!

    • 0


      Are you you living in a dream land?

      Be realistic for god sake.

      No action will be taken against any MP.

      No action will be taken against the three state bank chairmen and GMs who acted on the instructions of RAVI K and incurred losses.

      This is reality. Sirisena and Ranil are high politicians and hence no action will be taken against anyone. All steps to buy time and delay the process.

      AG will not take any action and Police will not file charges.

      Can you remember Sirisena saying three years ago about closing the airport to prevent corrupt politicians from leaving the country ?

  • 2

    Mr W A Wijewardena,

    Not only the CB, but also the EPF that is under the management of CB should be reformed to eradicate all the scams/rackets that take place …….especially the pump and dump schemes that took place under the last government – now those are submerged due to the prominence of the “bond-scam.”

    I believe the EPF is nothing but a glorified mutual-fund managed by the government on behalf of the workers ……………investors in mutual-funds “out there” all over the world have to face the vagaries of the stock, bond markets etc…..and their investments will appreciate or decline accordingly and this will reflect on their investments at the time of withdrawal …………

    I assume the EPF, irrespective of the vagaries of the markets, has some pre set formula to distribute the workers contributions at the time of their retirement. ……..I believe this is the reason for the lethargy of the worker-contributors to protect the EPF from the EPF-scams of the “champions” of SL “workers/toilers.” ……………….. The funds in the EPF is so vast, they are sure they will receive their pre set retirement-payments irrespective of the pilfering.

    Could you please elaborate how the EPF funds are paid-out to the workers at retirement?

  • 2

    Raiding pension funds is a common scam by fund holder company directors in UK and the US. Mahendran has learnt this and imported it to Sri Lanka under the sponsorship of PM, RW and RK. The naïve President was duped into signing the death warrant of EPFs by stupidly signing the appointment papers of the executive of Ranil’s cunning plan through, again following Ranil’s dishonest advice. It is a serious white collar robbery, and all the perpetrators should be punished regardless of their position in politics or business. Crime is Crime, there should be no greys in it. Punish the criminals as well as reforming CB. No point in harping on CB alone, heads must roll and set an example and deterrence so that it won’t happen again, ever.

  • 1

    The whole system needs to be revamped. It is excessivly politicised. It is too many levels of politics. It is too many politcians. Just understand what can 9000 politicians do in this small 65000 sq. Km island. If it is australia, russia, Canada, USa, China, India etc., we can understand. but not Sri lanka. They want more in the Parliament. Instead of distributing administrative services which they had earlier, now they have superimposed that with more politicians. It is true, Central bank need to be free of politicians and appointments and over looking it should be by the parliament and not by the governing party or the minister or the president .

  • 2

    When CBSL were rigged between 2008 – 2014 to the tune of 4 – 5000Billion; where were You?.
    You being such a learned and an Expert, weren’t you also partly responsible for not initiating and advising during this time. Didn’t you’ll have the Guts to inform the Hierarchy the way the Private Placements were happening and the colossal losses incurred (10 (TEN) Billion as against 4000Billion)
    What hypocrisy is this? The Biggest Scandal in Asia – Loss is one Trillion – MY FOOT. There ‘s a thing called RETRIBUTION. this curseth should come upon them. The so-called SACRED when they left the Govt (when they were chased) were there reserves in the Treasury.

    • 1

      Idiot, why do you think the people voted in a Yahapalanaya government? It was to arrest and punish those that scammed 2008 to 2014 if they did, on the promise of conmen like RW and MS that turned out to be liars once they were in power. People were duped. Instead the new law makers became the new scammers and robbers. Yahapaluwan had 3-years to find the culprits of previous scammers and punish them, and they have done thing. They have not been able even to take one politician that you alleged as scammers to court and lock up. That means either they did not scam, or if not the Yahapaluwan simply copied the tricks of the previous lot and applied it to rob more for themselves; they did not search and punish the previous criminals because they protected them as an insurance to protect themselves on the day they get toppled from power. All of them are baskets that duped the voters, and the second lot are worse than the previous lot, because they came into power on the TRUST people placed on them. They are traitors, through and through and deserve to be shot. Whoever come into power next, I hope and pray that they will lock up this Yahapalu criminals for a very long, long time.

    • 0

      Desmond Fernando. You are dumb and Deaf. How many were prosecuted and how much recovered by Ranil’s FCID. why don’t you talk about Ranikl appointing another Accused of the Avant Guard Scandle to investigate the President’s commission findings. Marapana stepped down from the minister post. that is how his honesty, integrity, responsibility and accountability. Even now, One marapana is Arjun Aloesius’s lawyer. So, Ranil is helping Arjun aloesisys indirectly. JUST SAY every thing is like Ranil’s FCID.

  • 3

    The fault of the Central Bank [CB] lies not with the Governors or its chief officers but with the administrators in the government. The CB lasted for nearly 50 years without any notable blemish except that of N U Jayawardene who was either removed or asked to resign, which he did for being found unfit to hold the post by a Commission. There were others who carried out what the government wanted even if those were found to be unethical. The one who did a straight job did not get the second extension as he did not carryout certain dirty jobs , sometimes coming from the spouse of the President. All this ended up with Cabraal. He was the agent of MARA. His Greek Bond episode sending billions down the drain, Commonwealth Games Bid Fiasco where he spent $8 million. Investment of Rs.1500 mn EPF monies Mihin Air and Sri Lankan Airlines loss making The Finance Co. are financial criminal acts. It is the governments at fault not the CB. The idea of enacting another MLA would be like the enactment of the 1978 Constitution

  • 2

    Yes, Mr. Fernando, Many top CBSL officers are, in my opinion are also responsible in one way or the/ turning a blind eye for what happened during 2008/2014. In the good old days no CBSL officer occupied positions in commercial banks after retirement. But during the last 6/7 years two Deputy Governors went to occupy Chairmanships. Those are unethical. Many highly qualified DGG of yesteryear,did not resort to such menial things even as they received paltry pensions. These DGG did not help resolving the pension anomalies that existed for decades. One DG was a member of the stinking Commonwealth Games Bid Committee. Some were observed engaging in making their subordinates eat prawns without cleaning them. One DG vehemently objected pension of the pension anomaly while reporting to increase their salaries in laks.

  • 0

    Ravi the Liar also has over ridden the CB and has instructed all the banks and the customs to use a Private business for money transactions via Credit cards. the name of the man is Muhunthan Carnagie.that looks very dangerous as sensitive information is collected by a private business and information can be sold, manipulated etc., etc., did this govt also privatize jewellery pawning from state banks to private banks. That is also very demeaning to poor people. govt also should have a limit of foreign ownerships to banks getting into stock market. This govt is handling the banks and financial system vert dangerously and selfishly.

  • 1

    The Bond Scam is the work of a new set of thieves – the Royal Thieves!

  • 0

    The media frenzy: When I read about the Central Bank problem, I feel like Imelda Marcos of Philippines who said: “I get so tired listening to one million dollars here, one million dollars there, it’s so petty”. I feel like saying “I get so tired listening to a billion rupees here and a billion rupees there. It’s so petty. As if billions were trillions!”

    The media is responsible for blowing up the issue out of proportion, making people think that a billion is a trillion. Come on people, we have a population of 22 million in this country and 11 billion works out as just Rs 500 per head. To put it in to proper perspective, that is the price of 5 big coconuts or a good Shawarma plate for 2 in Bahrain. It is silly and demeaning to be so miserly. Okay, tell me, do you know anyone who would die if he/she loses 5 coconuts? I don’t think so. Here there is no one who would die because he/she missed a Shawarma.

    Nothing is going to happen because of these billions. Take Greece. They were saying that Greece will go bankrupt with all those loans running in to trillions. But, no one died of starvation, tourist arrivals have increased, money is pouring in to the country. Everyone seems to be happy now.

    Forget the Rs 500. Vote for anyone you like, as long as he/she is UNP. As Imelda said, “Win or lose we go shopping after the next day”. (That makes Imelda special because a tomorrow exists for her. For other Filipinos only today exists).

    Acknowledgments: Imelda quotes supplied by my former housekeeper Silvestra, a great fan of the Marcos’s.

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