By W A Wijewardena –
Dr. W.A Wijewardena
Blaming the Central Bank for all economic ills
Former Finance Minister Ravi Karunanayake in an interview with Daily Mirror is reported to have pronounced that the Central Bank is absolutely corrupt and inefficient. This is an important revelation since it has come from a former Finance Minister.
He has also opined that the current economic slump in which the growth rate for 2017 has fallen even below the historical average of 4% is entirely the handiwork of the bank. Though the Central Bank’s final accounts have so far not been released, Karunanayake has revealed that the bank has made a loss of Rs. 2.1 billion in 2017. If true, this is a sequel to the losses made by the Central Bank since 2013 except in 2016. He has charged that the bank was the biggest problem he faced with some stooges of the former governor, meaning Governor Ajith Nivard Cabraal and not Governor Arjuna Mahendran, still running the bank. Yet, nothing had been done to cleanse the bank of these bad elements, he laments.
Then, he had elaborated: “You could see it by its performance. You see the economic growth rate coming down to 3.4%, the inflation rising to 8.4%. These are what the opposition would like to see. These are the elements that ran the economy down then. The govt has changed, but not the officials. They are detrimental to the economy of the country. These Central Bank people live in cocoons and try to toe the agendas of other people. I say it with absolute responsibility that crooks are still remaining there.”
He has even confessed to the fact the Prime Minister under whose Ministry of National Policies and Economic Affairs the bank has been gazetted for administration purposes has been a victim. According to him, the bank has used its autonomy to keep the “poor Prime Minister” in the dark. And as a result, the Prime Minister had to take the blame for the actions of the bank which it had done without consulting him.
Central Bank is not a sacred cow
The Central Bank is not a sacred cow that is beyond public scrutiny. It is a public institution and should be subject to public review. Hence, Karunanayake has all the right to express his critical opinion on the bank. As the Buddha advised in Brahmajala Sutta to his disciples, the Monetary Board should take these criticisms positively and tell Karunanayake that in this sense he is correct and in that sense he is wrong. The country which advocates openness, transparency and good governance needs such a fruitful dialogue very badly.
But, as mentioned before, the responsibility for managing the bank has been vested by Parliament with a corporate body known as the Monetary Board when it enacted the enabling legislation called the Monetary Law Act or MLA in 1949. And, hence, Karunanayake’s criticisms are levelled against the Monetary Board and not the institution known as the Central Bank or its officers.
It is the Monetary Board which has to take credit for success or blame for failure. Thus, when Karunanayake says that the Central Bank is inefficient and corrupt, it is the Monetary Board which is inefficient and corrupt. A farsighted Monetary Board will always take these criticisms positively.
Master is the Monetary Board
That Monetary Board consists of the Governor of the Bank as Chairman, Secretary to the Ministry of Finance as an ex-officio member and three other persons, known as private members, appointed to the Board on their expertise in economics, banking and finance.
Of them, the Governor is appointed by the President on the recommendation of the Minister of Finance; the three private members are appointed again by the President on the recommendation of the Minister of Finance in consultation with the Constitutional Council set up in Parliament.
The Secretary to the Ministry of Finance is appointed by the President but he would not have appointed a person to that position unless he has got the sanction of the Minister concerned.
The holders of positions of the Monetary Board today are all those who had got those positions during the tenure of Karunanayake as the Minister of Finance. Hence, it is a little awkward when he says that it is inefficient and corrupt since he himself had a hand in creating it.
Monetary Board is autonomous
But the Monetary Board, as also has been admitted by Karunanayake, is an autonomous institution. Except in the case of the Secretary to the Ministry of Finance who can be removed at any time, once appointed, the Governor or the three private members cannot be removed even by the President unless a special procedure laid down in MLA is followed.
In the whole history of the Central Bank, a governor has been removed only once and that was in 1954 when the late N.U. Jayawardena had occupied that position. With respect to private members, there has not been any occasion where a member has been removed by the government. This is the sanctity with which the successive governments and their political leaders had treated the Monetary Board as an institution in the past.
Finance Minister or Prime Minister cannot issue directions to Monetary Board
Following the practice relating to all the central banks in the globe, the Parliament has dictated that the Monetary Board should enjoy independence with respect to its policy, known as the policy independence, and to its budget, known as budget independence.
Accordingly, the Minister of Finance or even the Prime Minister or the President cannot issue any direction to the Monetary Board. This is different from the provisions relating to other public institutions in which the Minister concerned can issue general or specific directions to the Boards of Directors of such institutions and once they are issued, it is the responsibility of the boards concerned to implement them. If the Boards fail to implement them, the Minister has powers to remove directors in most cases, without assigning reasons.
But, there could be instances where there is disagreement between the Monetary Board and the government with respect to certain policies. For instance, the Board may be of the view that interest rates should be increased in order to fight inflation, while the government may feel that they should be lowered to stimulate economic growth. MLA has provided for in Section 116(2) how such disagreements should be dealt with. Accordingly, if the government and the Board cannot reach agreement, the Minister of Finance can direct the Board in writing that it should carry out the directions of the government but the Minister has to clearly indicate that the government would take full responsibility for the consequences that may be brought in the economy as a result of implementing such directions.
Again, in the whole history of the Central Bank, it was only on one occasion that the government resorted to this special provision. That was in 1959 when Wijayananda Dahanayake was the Prime Minister; in this case, the emerging adverse macroeconomic conditions of the country did not warrant the Board to reduce interest rates. But the government, thinking of winning the elections to be held in the following year, directed the Board to reduce interest rates. However, this strategy did not work and the Dahanayake government could not win the elections; even the Prime Minister Dahanayake lost his seat in Parliament.
Budget independence
The Monetary Board enjoys the budget independence because its budget, unlike other public institutions, need not be approved by Parliament. This independence is necessary to enable the Monetary Board to take its policy measures without the fear of losing its budget.
Politicians have always grumbled about this special independence afforded to the Central Bank by Parliament in 1949. Since they feel that they can do anything in the country, except perhaps turning a man into a woman or a woman into a man, they always try to grab powers to intervene in the affairs of the Monetary Board.
Independence is needed to protect people’s money
However, there was a very good reason for the Parliament in 1949 to keep the Monetary Board independent from the successive politicians. That is because a central bank is a unique creature with powers to print money and buy assets. This power has to be used by the Monetary Board responsibly, since any excessive printing of money at the bidding of politicians would result in inflation causing the public to lose the buying power of the moneys they hold.
Though the Board is appointed by the political authority of the country, its obligation is not to such authority but to the general public. To serve the public properly, the Monetary Board should be independent from outside parties including the political authorities.
While the Central Bank of Sri Lanka is a semi-autonomous institution, central banks in Germany, UK, France, Australia, New Zealand and Canada have been made fully independent from the government. The present tendency is for the central banks in other countries too to follow suit.
Politicians are like kids
Politicians have been kept away from central banks because of the tendency on their part to abuse the money printing powers vested with central banks. This power is equated to a cookie jar with no lid; the Minister of Finance who is equated to a kid cannot resist the temptation to eat cookies as much as he wants.
If the central bank is not independent, the Minister of Finance, like the kid with limitless desires to eat cookies, will direct the Monetary Board to print money freely and make it available to him for meeting extravagant expenditure programmes. This is dangerous and will result in people losing the value of moneys they hold.
Hence, the Monetary Board have been given power by Parliament to keep the lid of the cookie jar tight so that the Minister of Finance cannot eat cookies as much as he wants. This is the autonomy which the Monetary Board enjoys to serve the public that has been questioned by Karunanayake in the interview under reference. This is a dangerous trend that should be prevented at any cost.
Karunanayake’s attempt at steamrolling the Monetary Board
During the two-year period he held the Finance portfolio, Karunanayake tried to steamroll the independence of the Monetary Board on a number of occasions. This writer in a number of articles published in this series drew the attention of the public to this ominous development.
In August 2016, an article titled ‘Be warned! Monetary Board is losing its powers as well as independence’ criticised the Minister’s attempt at grabbing the powers of the Monetary Board and eroding its independence. The Finance Minister’s interference with the Monetary Board in proposals in Budget 2017 was highlighted in an article published in November 2016.
The unsavoury sign of Finance Minister’s steamrolling the Monetary Board was brought to public’s knowledge in another article published in January 2017. The Prime Minister’s instructions to remove the direct placement of Treasury bonds with primary dealers in 2015 was considered as an erosion of the independence of the Monetary Board, in another article published in October 2017.
The objective of these articles was to put good economic sense to the politicians in power so that they would refrain themselves from taking action to erode the independence of the Monetary Board. However, now it appears that this message has not been conveyed to the political leaders concerned. Hence, it is now left to the civil society to raise its voice to prevent myopic politicians from making attempts at subjugating the Monetary Board which result in the public losing the value of money they hold.
Communication channel with Government is through Finance Minister
Karunanayake has alleged that the Monetary Board has kept the Prime Minister in the dark. This refers to a communication gap between the Prime Minister and the Monetary Board.
As highlighted by the architect of the Central Bank, John Exter, in the Exter Report, the communication channel between the Monetary Board and the government is through the Secretary to the Ministry of Finance.
Justifying why Secretary should be made a vote carrying member of the Monetary Board, Exter has said that it would serve a bigger purpose. That is, the Finance Secretary will function as the communication conduit between the government and the Monetary Board.
On one side, he would make the views of the government known to the Monetary Board. On the other, he would take the views and the position of the Monetary Board back to the government paving way for a free dialogue between the two bodies.
If the Prime Minister has been kept in the dark, that is due to the failure of the Finance Secretary to keep the Minister informed and, if it had been done, the failure of the Finance Minister to keep the Prime Minister informed. This writer recalls that this communication channel worked effectively prior to 2009.
Current inflation is due to money printing in the past
Inflation is picking up today due to excessive money printing done in the past. The main culprit in this case has been the Government which has borrowed from the banking sector on a net basis. Between December 2014 and December 2016, the Ministry of Finance had borrowed from the banking sector on a net basis a total of Rs 545 billion, an increase of 25% over the level in December 2014.
This is an instance of the Minister of Finance helping himself from the open cookie jar freely. The consequential increase in money supply has increased the total demand for goods and services over and above the total supply putting pressure for the prices to increase. Thus, the fiscal dominance over the monetary policy has been the one to be blamed for the current rising inflation.
The solution has been to keep the lid of the cookie jar tight so that the Minister of Finance cannot put his hand into it freely and help himself. As a measure to do so, the Monetary Board is now planning to introduce a flexible inflation targeting system as from next year. It is encouraging that the consent of the new Finance Minister and the Prime Minister has been given to the Monetary Board to implement this programme.
An instance of rendering unto Caesar
In the old Roman Empire, political leaders often abused their powers quoting that they were Caesar’s instructions. Thus, Caesar was blamed for every bit of failure of the system. Are the criticisms levelled against the Monetary Board today an instance of attempting to render it unto Caesar?
The next part will look at how far the Central Bank is responsible for the current economic slump in the country as alleged by Karunanayake.
*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com
Jim softy / January 2, 2018
In another article, in the CT itself, author of the article says, that RAVI the LIAR spent Rs 60 million to defeat CBK govt. I heard this time (rumours) , what Penthouse Ravi got Santhosam from Aloesius, Ranil had asked to take his money, that is what he spent for the party.
the problem is newspapers reported, from the PCOI investigations, numerous wrong activioties. Yeyt, no one is arrested. futther, I heard some of them still keep the loot in bags inside their houses.
Why did not you write that who modified the foreign Exchange control act and made Ravi Karunanayake acquitted.
All these are by law makers themselves. How can a investor trust that country for their money ?
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Jim softy / January 2, 2018
There are PHDers holding MBAs as deputy governor. Even then Ranil appointed a foreigner with less qualifications probably (because he was a schoolmate). why was that ?.It looks Ranil every where had played some kind of roullet like game.
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Perriamama / January 2, 2018
Reading the interview with Ravi, one would be forgiven for thinking that the PM is an innocent baby.
Is he?
If her is, then maybe he should handover to an adult and come back when he is an adult!
Thanks for the expose WAW
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raza / January 2, 2018
There is ample truth in Ravi K’s statement. But will it justify the wrongs alleged to have been committed by Arjun Mahendran, or Arjun Alloysius.
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Jagath Fernando / January 2, 2018
Our political system is so corrupt that guys like RAVI K are still hanging in the system waiting for a come back. He was charged by the High Court on Forex manipulations together with his accountant buddy Lincoln Piyasena on funds received from Raj Rajaratnam.
Raj is in jail but RAVI and Lincoln are roaming around as if nothing hapenned.
May god bless our legal and regulatory system. We are corrupt to the core and getting away with white collar crime is so easy !!
Thank you Sirisena for appointing Indrajith to the Governor post but the same cannot be said about all of the Monetary Board members unfortunately.
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Sarrij / January 5, 2018
J F
Indrajith was a good choice.
The Pres has made a poor choice in RW as PM i.e “cunning RW”. He has the prerogative to get rid of him now and he should; he is the one who insisted on the crook AM.
The time is rife for a cabinet shuffle!
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Upali / January 2, 2018
This is Srilanka. A few years back MR as Finance Minister announced in his budget speech a 3% devaluation the political Governor Cabral came to know only when listening to the budget speech from the easy chair of his office.
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K.Pillai / January 2, 2018
We, the Lankan silent majority rated the RK outburst as a puerile response from a hurt child.
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Sinhala_Man / January 2, 2018
We seem to be now arriving at the point where the country as a whole must try to understand how a very limited number of people have, over a period of perhaps fifty years, bankrupted this country, which nature has blessed so abundantly.
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Any conscientious and diligent person of average intelligence can become a competent accountant. However, the moment we, as adults, start doing things involving money, we realise that Economics is a much more complicated business, and we need persons with Dr W.A. Wijewardena’s outstanding intelligence and honesty to guide us.
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Dr W. has patiently written a series of well-substantiated articles, whose value cannot be assessed in terms of the number of responses received. Why has he done so? That is NOT something that can be evaluated in monetary terms; it is because he has a sense of values, whereas the politicians we have kept electing have been the worst available. From Dr Ameer Ali I learnt the word “Kakistocracy” – not a scatalogical term, but one of Greek origin.
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Now, we MUST seek to change things around with our “precious votes”. The problem is that mine will be one of probably about 12 million that will actually be cast, while another million people will stay away on the 10th of February since they think that there is no point voting. Too many votes automatically go to the biggest parties.
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Relative to the country, I’m educated, knowledgeable and “English Using”. My vote must, therefore, go to the UNP. Not to Rajapaksa’s cohorts, because my “Sinhala” handle, though accurate, was always meant to be provocative. I’m no racist.
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The evidence before us now indicates that such “automatic voting” will not do. I’ve not read ANY of Dr W.’s articles carefully enough. This one I must. It’ll require time and some cross-referencing.
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Will be done!
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Douglas / January 2, 2018
On hearing RAVI K’s statement everyone in Sri Lanka must refresh his/her memories of the story that was told by the teachers in lower or higher kindergarten : the story of the “FOX” who tried so many times to get at the bunch of grapes held high but could not reach it and walked away saying that grapes were sour. The only difference as regards this “FOX” is, he never gives up because there are all the people who have teamed up with him holding very high profiled positions in the Governmental affairs of the country. With that BLESSINGS he is still the “VICE” President” of that GANG of “FOXES”. Nothing STRANGE to get disturbed and write articles on the comments these “FOXES” make.
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Jim softy / January 2, 2018
The question is why PResident pretends he does not understand anything. He is supporting thieves too or he is waiting until the February 10th come
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Jim softy / January 3, 2018
Why did Mr. Sambanthan said that I am not saying that “Mr. Ranil wicramasinghe is not corrupt. I am also not saying that Maithripala sirisena is corrupt”. what is the message Mr. Sambanthan gave in between lines. I heard Anti-corruption activitst Ranjan aRamanayake, when asked about Arjun Mahendran’s corruptions. He had started to explain it in terms of “ALTERNATIVE FACTS” as Nicky Hally of Trump did. In other words, Ranil Ramanayaka ehad said, Mahinda Rajapskwe govt was more corrupt. but, he di dnot go further and say that Yahapalanaya’s first promise was prosecuting previous govt’s thieves and not writing a new constitution.
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Percy / January 3, 2018
The Central Bank is run by the Monetary Board and has always been an independent body. Once it’s independence and integrity is tainted it will impact on the whole economy, it’s currency, it’s role as an independent arbiter in the international monetary system. The attempt by RAVI K to insinuate and make the baseless allegation that the Central Bank is corrupt, is nothing short of a criminal act, and he MUST be dealt with.it is clear that RK is smearing the integrity of the CB as it came in the way of his attempts to rob and plunder the Treasury. Ranil W too has been aiding and abetting RAVI here and it is time Sirisena pulled out his sword to behead both these traitors.
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sinhalese buddhist / January 4, 2018
No one trusts the Sri Lankan Central Bank internationally anymore, thanks to its leaders and our politicians.
In order to change that situation, its leadership should be purged, new laws and protocols set-up to prevent fraud and corruption, and such reformation needs to be internationalized and open to verification by international bodies which includes well-respected experts.
Do the Sri Lankan people have the guts to demand transparency and reform from our politicians and judiciary?
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Justice & Fairplay / January 4, 2018
Following the recent expose, this man Ravi K should retire from politics and salvage whatever that is left of him in terms of self respect.
He has been a great embarrassment, and has contributed mightily to the impending downfall of the UNP.
Had the UNP any sense, it would have immediately distanced itself from Ravi K no sooner his name got dragged in, but the fact that it didn’t says a lot about its cliquish mentality.
It is now hard to imagine that the UNP will have any political future since the need of the hour are not mavericks but honest, decent, solidly educated men as members of the cabinet.
They have none other than themselves to blame for their impending predicament.
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Bren Sosa / January 4, 2018
All those of the U N P whose names figure in the Bond Scam Inquiry should immediately resign from Parliament and their places given to those on the “waiting list.” until the next election. The party should be headed by its deputy leader Sajith Premadasa. This is the only way open to the “Grand old Party”. Ranil who by his own admission had been taken for a “ride” by Mahendren should retire gracefully. If he was so naive he is certainly not fit to lead the U N P
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Bren Sosa / January 4, 2018
Wss Ravi Karunanayake at any stage involved with the I presume “Roten Vanden” enterprise?
is it there that he made his initial fortune?
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A.D.J. Perera / January 6, 2018
The talk down the grapevine is RK joined Roton-Vander Shipping in Colombo Fort years ago – whose founder was the late Shelton Perera. The other original minority partner was a Mr. Vandersay. How the super-ambitious RK took over the company and ousted Shelton is a matter of conjecture – at worst. A good and close examination of RK’s business enterprises and assets will reveal the amount of corruption engaged in by our “political leaders” What happened to Raj Rajaratnam’s US$3 million will be a story where the country will learn how some of our politicians cheat foreign investors and in the process give the impression to overseas investors Sri Lanka is a land of cheats. RK is not the only one. If you study Gammanpila’s mis-adventure with an Australian couple, the extent to which some crooks are present in our financial market becomes patently clear.
ADJP
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Liyanamahathaya / January 7, 2018
The Rajaratnam-RK affair is just one example of how our Courts and judicial system has, and can easily, be manipulated to undermine the legal process by politically well-placed rogues. If there is any sanctity at all in our judicial process this Case must be opened again and justice meted out to the deserving. Raj Rajaratnam is expected to be released, for good behaviour, soon. In Rajaratnam’s eyes it is not RK who is on trial for stealing but the entire judicial system of a nation of 21 million.
Happily, Mr. Wijewardena, formerly high up in the Central Bank, is an exception in this sickening process. At least, he is one example to the world there are decent, honourable people left in this collapsing land.
Liyanamahathaya
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Rohantha / January 4, 2018
I Hope Mr Wijewardena with all his experience, qualifications and down to earth personality would lead the Central Bank one day to the benefit of all Sri Lankans.
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