By Hema Senanayake –

Hema Senanayake

Arjuna Mahendran has gone now. So, it is the time now to relist the Central Bank under the purview of the Ministry of Finance. I submit two important reasons for it. Both reasons are equally important. One reason is about the line of authority and the other is about the macroeconomic management of the economic system. Let me begin as follows.

Recently, top officials of the central bank were summoned to testify before the COPE (Parliamentary Committee on Public Enterprises). According to newspapers, those officials have testified that former Governor Mr. Arjuna Mahendran had violated all laws in the institution. Such a law breaking governor has to be there in order to execute the policy decisions made by the Ministry of Policy Planning and Economic Affairs under which the CBSL has been listed as at now. It is because the secretary to the Ministry of Policy Planning and Economic Affairs does not represent in the Monetary Board. Therefore the said Ministry needs to have a proxy in order to exercise its authority over the Central Bank and the Monetary Board –And that man it seems was Mr. Arjuna Mahendran.

If there was no such proxy, the Ministry of Policy Planning and Economic Affairs would not have had any meaningful authority over the CBSL even if the CBSL is listed under that Ministry, because it is the secretary to the Ministry of Finance who represents the government in the Monetary Board under which Board, CBSL operates. Therefore, if the Ministry of Policy Planning and Economic Affairs wants to instruct anything direct to the CBSL which is the operating arm of the Monetary Board, the Ministry has to have a Governor who is ready to listen and carry out its virtual orders. It is in this process that all laws could have been broken.

Now, let us assume that the new Governor is listening to the Monetary Board not to the Ministry of Policy Planning and Economic Affairs. Therefore, the government’s view or likely decisions to be made by the government must be communicated to the Monetary Board only through the secretary to the Ministry of Finance, because, even though the CBSL listed under the Ministry of Planning its secretary is not a member of the Monetary Board as mentioned above. It is proper for the government to maintain its relationship with the CBSL through the secretary to the Ministry of Finance always. We also hope that the new Governor Dr. Indrajith Coomaraswamy will manage the CBSL by the decisions made by the Monetary Board.

In view of above, I do not see any reason as to why the Prime Minister still keeps the CBSL under the purview of the Ministry of Policy Planning and Economic Affairs. How do we resolve this dilemma? Sometimes our President uses an interesting strategy in resolving this type of “serious” technical issues in governance. He asks the officials to submit their views in writing on certain issues. Such documentations are truly important because no one wants to give false advices in writing even though some officials might distort facts during verbal submissions. In this particular case too, we prefer if the PM’s chief advisor Mr. Paskaralingam explains to the nation by issuing a communiqué as to why the CBSL should continue to be listed under the purview of the Ministry of Policy Planning and Economic Affairs while the Ministry’s secretary not representing the government in the meetings of the Monetary Board. I hope civil society activists might be interested in receiving such a communiqué.

Do not blame me for being bold enough to write the truth. I gave the proper advice to the government in this regard immediately after the gazette notification was issued in late January or early February of the year 2015. My analysis was initially published on Feb. 27, 2015 in the print version of Ceylon Today. It would be an interesting read for the readers of Colombo Telegraph. I quote below a few excerpts.

“There is one single difference between the Ministry of Finance and all other Ministries of the government. What is it? That is, the Ministry of Finance handles what is known as macroeconomic fundamentals. The functions of all other ministries have microeconomic dimension. Why the people should care for this difference? Let us investigate this matter with a view to find an accurate answer…”

“If the Ministry of Finance has understood that its primary role is to take care of the macroeconomic fundamentals of the country, then it should not have allowed the Central Bank of Sri Lanka (CBSL) to be listed under the Ministry of Policy Planning and Economic Affairs. This listing is irrational and bad for the country. However, the proponents who have suggested listing the CBSL under the Ministry of Policy Planning and Economic Affairs have had an instinct that the CBSL has something to do with macroeconomic fundamentals. Therefore, they drafted the functions of the Ministry of Policy Planning and Economic Affairs in an amusing way. This was clear from the Gazette notification issued by the humble President Maithripala Sirisena…”

“According to the Gazette notification, the Ministry of Policy Planning and Economic Affairs, has been assigned the functions of “formulation of monetary policies and macroeconomic management in coordination with the Central Bank of Sri Lanka” and “liaising with donor agencies and international financial institutions,” among others. Interesting! Isn’t it? Again look at the term ‘macroeconomic management’; this function has now been made a function of the Ministry of Policy Planning and Economic Affairs…”

“As far as economists know, in any country macroeconomic management begins with the national budget. Why? – Because the national budget does affect to a lot of variables or parameters of the economic system. If I explain it in a mathematical statement, I would say, the Budget is a function of many variables such as total credit growth, private sector credit growth, foreign borrowing, exchange rate, including GDP. Finally, these are the variables and targets that are taken by the Central Bank to regulate the country’s money supply and to regulate inflation. This is true even with European Central Bank (ECB), which is considered the most independent Central Bank in the world. ECB wants each member country sticks to certain budgetary principles; otherwise ECB knows that it will end up nowhere…”

“This means that both the taxation authority and the monetary authority should work together in setting the best possible macroeconomic fundamentals for the country or even for a monetary union like the European Union. As you may know, Sri Lanka’s taxation authority is the Treasury and the apex monetary authority is the Central Bank; both should work together under one line ministry. Now some people may argue as to how ECB works without the backing of the taxation authority. This is the very reason that ECB is being considered the weakest Central Bank in the developed world. This was evident during and after the Great Financial Crash of 2008; when the Federal Reserve of the US found its own solutions during the crash, the ECB had to go after the IMF. No Central Bank can execute effective monetary policy without the backing of taxation authority, no matter whether it is independent administratively or privately owned, period.”

“Let me explain this point from another dimension. The Central Bank of Sri Lanka (CBSL) is governed by the Monetary Board. In the official website of the CBSL, it explains the appointment of Monetary Board and its powers. From the website I quote:

“In terms of the Monetary Law Act … the Monetary Board is responsible for making all policy decisions related to the management, operation and administration of the Central Bank. The Monetary Board of the Central Bank consists of five (5) members;

The Governor,

The Secretary to the Ministry of Finance (ex-officio),

Three (3) non-executive members.

The Governor is the Chairman of the Monetary Board and also functions as the Chief Executive Officer of the Central Bank. The Governor and the non-executive Board members are appointed by the President, on the recommendation of the Minister of Finance.

Accordingly, the Monetary Law Act empowers the Minister of Finance to make recommendations to appoint the members to the Monetary Board. But the Monetary Board so appointed now should report to the Minister of Policy Planning and Economic Affairs since the CBSL has now been listed under the Ministry of Policy Planning and Economic Affairs. That’s not all.”

“In the above quote it clearly says that the Secretary to the Ministry of Finance should, in his ex-officio capacity, be appointed to the Monetary Board. Why? – Because, he is to submit the fiscal policy manoeuvres that affects the monetary policy. Hence, his intervention is necessary for the Monetary Board to make its decisions. If the CBSL comes under the Ministry of Policy Planning and Economic Affairs, then the Secretary to the Ministry of Policy Planning should represent in the Monetary Board. What kind of fiscal policy insights he or she can bring into the Monetary Board? I do not know. Also, from a legal point of view, as far as I know, the Monetary Law Act does not provide for such an appointment.”

“However, I am pretty sure about one thing. That is, that the person who suggested to list the CBSL under the Ministry of Policy Planning and Economic Affairs knows nothing about “macroeconomic management,” but he thinks that macroeconomic management is something to be done in liaising with international financial institutions. That may be the reason he drafted that, “liaising with donor agencies and international financial institutions” to be a function under the Ministry of Policy Planning and Economic Affairs. You liaise with international financial institutions to borrow in dollars. It is about foreign borrowing. Foreign borrowing targets are submitted to the Parliament by the Ministry of Finance in its budget. Hence, foreign borrowing is purely a subject of the Ministry of Finance. Repayments of the foreign loans must be backed by the taxation authority, i.e. by the Treasury of the Ministry of Finance and hence repayments of foreign loans are, also a function of the Finance Ministry.”

“So, why did they put the subject of foreign borrowing under the Ministry of Policy Planning and Economic Affairs? It is because they think that the country’s macroeconomic management can be done in liaison with IMF and World Bank. They do not recognize the fact that macroeconomic management in any country primarily begins with the national budget.”

“In view of above, I earnestly suggest relisting the CBSL under the Ministry of Finance, at least after the general election.” (Should CBSL be relisted under Ministry of Finance? Ceylon Today, February 27, 2015). Quotes end.

In view of above all, I would say that the present relationship between the Ministry of Policy Planning & Economic Affairs, and the Central Bank cannot logically continue if the new Governor Dr. Indrajith Coomaraswamy would not become another proxy like Mr. Mahendran, willingly or under pressure. Therefore, the best option for both the Prime Minister and for the new Governor is to put the CBSL back under the purview of the Ministry of Finance.