23 March, 2019

Blog

The Central Bank Vs. Its Critics

By Hema Senanayake

Hema Senanayake

Hema Senanayake

Dr. W.A. Wijewardena pointed out that the Central Bank of Sri Lanka (CBSL) made losses in the year 2015. In a recent article, former deputy Governor of Central Bank Dr. W.A. Wijewardena insisted that such losses made by the Central Bank are economic landmines that could explode at any time. Should I agree or should I disagree with his assertion?

First, I do not agree with the present wisdom of CBSL including its Board known as Monetary Board. If economy is broken and is not functioning well and the currency is not stable then do not blame P.M or President, instead put the blame on the Central Bank. If it is not sufficient then blame the P.M., President and other elected officials for not running the Central Bank properly. Having said that, I also would say that I do not agree with the said assertion of Dr. Wijewardena.

I always do appreciate Dr. Wijewardena’s writings. Unlike us who happened to be macroeconomic analysts, Dr. Wijewardena being a former Deputy Governor of CBSL knows in and out of central banking. Yet, if he makes an inaccurate analysis the CBSL could take the upper hand in rejecting not only his comments but also others’ views too. This would be a dangerous development. Therefore our criticism must be fair and must guide political authorities to perform their job properly.

The Central Bank is a peculiar organization. It makes operational losses but still transfer profits to the government. Can any business entity do this? Dr. Wijewardena commented on this situation as follows:

“The loss in 2013 was followed by a comprehensive loss of Rs. 22 billion in 2014, but the accounts of the bank for 2014 showed that the Monetary Board had made an interim profit transfer of Rs. 8.5 billion to the Government out of these losses. An institution making losses can pay dividends to shareholders only by running down its capital and that was exactly what the Monetary Board had done in the two years concerned.” (Colombo Telegraph, May 03, 2016)

The Central Bank has responded to Dr. Wijewardena and he wrote about it as follows:

“The Monetary Board apparently did not take this comment kindly and caused its operational arm – the Central Bank – to issue a statement disputing this writer. The Board had argued in its wisdom that there was nothing wrong in the Bank making losses because central banks are not supposed to make profits and it would be imprudent for a financial institution to have a capital base covering 100% of its domestic assets.” (Wijewardena, CT, May 03, 2016)

Dr. Wijewardena questioned about the Central Bank’s capital and its depletion due to losses and the Central Bank responded saying that there was nothing wrong in the Bank making losses because central banks are not supposed to make profits and it would be imprudent for a financial institution to have a capital base covering 100% of its domestic assets.”

The question itself, in fact has opened an escape route for the Central bank. Further interesting point is that the Central Bank transfers profit while making losses. This could have been done only if the Central Bank had “inflated” its Balance Sheet. Dear readers do not be alarmed, I am not venturing into a discussion on accounting even though I mentioned about the Balance Sheet of CBSL.

A Central Bank can never be insolvent and so is our Central Bank as long as people use the currency the Bank issues because the Central Bank can create money. But due to a legal and logical reason rather than practical reason when money is created by the Central Bank it is recorded or posted as a liability of the Central Bank. Let me explain this point a little further.

Let us assume that CBSL created Rs.100 billion in 2015. Is this Rs.100 billion an asset of the CBSL? Any accountant might think that it is. But, interestingly, this Rs.100 billion would be posted as a liability in the Balance Sheet of CBSL. In general, in any other business, liabilities are money borrowed from or invested by others. Yet, in regard to the CBSL, in our example, it did not borrow Rs.100 billion or nobody invested Rs.100 billion, instead CBSL issued new money (say bills and coins) amounting to Rs.100 billion. So, is this a liability? For any practical reason, the answer is NO. But, as mentioned above, this Rs.100 billion issued by CBSL would be posted as a liability in the Balance Sheet of the CBSL. As a result the balance sheet is inflated and this is what is going to affect the country’s economy for good or bad, but not the profit or loss of the CBSL.

This does not mean that CBSL can or should make continuing losses. In the business of finance when somebody makes losses, another person or entity makes profits. This might be equally true when CBSL makes losses. Hence, what the CBSL should have explained in reply to Dr. Wijewardena’s question was, as to why the CBSL had to make losses in previous years because the losses might have caused due to underhand dealings or due to incompetence or due to the unavoidable reasons in executing monetary policy.

In view of above, I have my doubts to support, if somebody takes a position that, “… central banks are not supposed to make profits, (but) they are not supposed to make continuous losses. That was because when a central bank becomes bankrupt with a negative networth – that is, when it does not have assets to cover its liabilities to outsiders – due to continued losses, the public as the owners of the central bank are required to recapitalise the bank at great costs.”

One of the concerned readers of CT had observed that he had been, “reading and listening for the last 40 years that Central Bank is going broke but still survives.” I respect for his feelings.

That is why I earnestly believe that we must submit factually accurate arguments always thinking as to what we would do differently. Therefore, I would suggest all interested readers and writers that we must launch a strong campaign for stable rupee. I assure you that even if Sri Lanka gets an IMF loan amounting to dollars 1.2 billion, the stability of rupee would not last even till the end of this year. How do we do differently to stabilize the rupee? This is a question that we must resolve during the campaign. If the rupee is stable then the above said need of the “recapitalization” does not arise in near future if somebody truly worries about such a possibility.

Print Friendly, PDF & Email

Latest comments

  • 7
    9

    Batalanda has borrowed USD 6,2 Billio in just 15 months of Yahapalanaya.

    Did the LKR stabilize?..

    It in fact it sky rocketed to over 150 Rupees.And beyond.

    Can the IMF 1.2 Billion bring it back to Earth.Only an Economist like Dr Harsha may say Yes.

    The good side is Nissan leaf has gone up to LKR 50 Lakhs .

    Toyota Hybrid is even more.

    My mates who managed to get these vehicles are sooo happy that they even mention Bodhi Sira in their prayers now.

    But I feel sorry for the poor Yahapalana suckers who believed that chick in the pre election add , who is now riding a Mopad.

    The car importers are up in arms .

    Simply put, Yahapalana Dispensers cant find the Dosh to pay the import bills.

    Because not only the Dollar has sky rocketed And the Waabis in Saudi can’t pay the House maids with USD 40 a barrel crude Oil.

    No wonder Yahapalana President said on TV the other day that our Dalits have nothing to worry, even with the jacked up VAT.

    He said Dalits don’t even eat Chocolade, Kraft Cheese and Angus beef.let alone drive Prius..

    What a consolation, what a relief.

    No wonder they didn’t even turn up at the Samanala Bridge to listen to more offerings which the Yahapalana Prez promised after May 1..

    By the way my Elders tell me that Samanala Grounds was where the Dutch used to keep Beef cattle, before they went into Lamprice curry.

    What a fitting location..

    • 6
      0

      The economy is in the tank and your biggest problem is the price of vehicles? Do we really need any more vehicles jamming up the roads?

      • 2
        2

        Everybody has a right to use a vehicle, It is the roads we need!

        • 3
          1

          srinath.gunaratne

          “Everybody has a right to use a vehicle,”

          Everybody has the responsibility to protect the environment. If you pollute you will die along with it.

          By the way, environment belongs to the future generation and not yours. You are only a leaseholder.

  • 8
    0

    Let me tell you that the USD was Rs. 8.50 in 1970 and today has gone upto Rs.145.00 . Who will you hold responsible. Since 1970 the SLFP has governed Srilanka for 27 years and UNP for 18 years. A Volkswagon was Rupees 7500 in 1960 and without any grudge now we pay Rs.12 million. It is pertinent to mention that in a bizarre move the then Finance Minister Felix Dias revalued the Rupee just before the 1977 general elections a decision totally unrelated to the economic fundamentals of the time. Also when Finance Minister Rajapakse announced a devaluation of the Rupee by 3% in his budget speech a few years back it surprised the Governor Cabral listening to the budget speech. The Central Bank responsible for maintaining the value of the Rupee stable was totally unaware of the move. This is how it works in Srilanka.

  • 0
    0

    “Let us assume CBSL CREATED (emphasis by me) Rs. 100 billion”. Interesting assumption by the writer. How do they do that? Is it simply by PRINTING money or ISSUED against the “growth” of the economy by way of EARNINGS in domestic and/or international terms. It could even be a “FICTITIOUS” asset to give a FALSE view as to the “health” of the institution so as to enable money transfers and pay dividends. If it is such an attempt, needless to say it is a “disaster”. Is our CB rally doing this and has it done in the forgone years? Can some one educate us on this specific matter?

    • 1
      1

      Thank you for your interest to verify facts. That’s what we all must do. I did not see a copy of the annual report of CBSL for 2015. If you can get a copy you may verify this point by yourself. Look at the liability section of the Balance Sheet and check for the item listed as “Currency in Circulation.” If there is an increase in 2015, it means that the CBSL has issued new money.

      Yet, do not conclude that this money is FICTITIOUS and is bad. This is another point that you and others must verify. Monetary paradigm is a little complex but anyway not rocket science. Thanks.

      HEMA

      • 1
        4

        Can you please, please, also check those mind boggling stats, which MP Wimal Weerwansa reeled off in Parliament yesterday, about Yahapalana Economics of Bodhi Sira, Batalanda Ranil, Galleon Ravi and the Singaporean..

        And he didn’t even go to “School” as I heard from the Yahapalana suckers.

  • 0
    0

    Mr. Hema Senanayake: Thank you for the response. I hope this topic will be discussed further and further by the “Know How” in the field. I tried in that short comment, to bring to the attention of the general public the “mechanisms” that are deployed very often by the “experts” and the “manipulators” to create a rosy picture of the country’s economy. That is our experience and hopefully, those “know hows” will contribute their expertise to this subject. Till then I rest. Thank you again.

  • 4
    1

    Who is Hema Senanayake? Other than the fact that he has published a couple of books, I cannot find any information about him, what his background is, whether he is an economist or a plagiarist – or why I should believe anything he says.

  • 1
    3

    Do not worry about the man who wrote. If the contents are ok take it.
    If you do not know who Hema Senanayake , it is not his problem, but yours

    • 3
      1

      What an idiotic statement. The facts appear to be mainly anecdotal (he does not cite a single empirical source for his more questionable assumptions), which makes me think the article is complete bunkum.

  • 0
    0

    [Edited out]

Leave A Comment

Comments should not exceed 300 words. Embedding external links and writing in capital letters are discouraged. Commenting is automatically shut off on articles after 10 days and approval may take up to 24 hours. Please read our Comments Policy for further details. Your email address will not be published.