By Hema Senanayake –
All good hopes will be dashed if the good-governance government failed in economic governance. Establishing democracy is good but it is not everything; people hope for better economic governance too. In New York, I just got two minutes to explain this to President Maithripala Sirisena in a formal event when he was in New York in order to attend the United Nation’s General Assembly. He was so attentive and quite a few times nodded in assenting during my speech. Hence, for the readers benefit I submit below the near exact translation of my statement. It is as follows:
“… Your Excellency President, Honorable Ministers, Ambassador, distinguished guests and friends.
The Sri Lankan community in New York is keenly interested in the governance of Sri Lanka. As far as we know there are two segments in governance. The work or duties in the first segment can be done through the frame work of democratic process. The work which falls into the second segment cannot be executed only through the democratic process; and this is the segment of economic governance. This is an important segment – And what is applicable here is the theoretical and technical expertise of the officials –elected or appointed- who execute the macroeconomic policies.
For an example, the rupee is depreciating now. The value of one U.S. dollar has now exceeded Rs.140. There is no democratic procedure to bring it to a reasonable value. This can only be done by officials who have high economic expertise.
Who is the official who has high level economic expertise? I might be able to give you a clue on this question. As at now the largest economies have become the most indebted economies in the world. For an example the public debt in Japan is 230% of GDP. In the USA this ratio exceeds 100%. Europe is no different except a few countries.
Therefore, the person who can accurately explain as to why the largest economies in the world have at the same time be regarded as the countries with highest public debt, is a person who has the best macroeconomic technical expertise.
Dear Mr. President unfortunately, the true excellence for macroeconomic know-how is not pursued within the formal economic establishments including International Monetary Fund. This is happening outside the establishments. The real challenge is to bring this know-how into the segment of economic governance. In this regard, the secretariat you proposed to coordinate with intellectuals – expatriate or local- will be very useful for the country. Thank you all” (Statement Ends)
Immediately after I concluded my speech, the audience got agitated looking for an opportunity to take pictures with H.E. President. Mothers either with their children or sometimes in haste without children posed for pictures with President. Most of the time women and children were more aggressive than men in posing for photographs. One gentleman told me that most of them are not party loyalists. I was looking from a distance. I enjoyed by observing the sincere and lovely behavior of these people. Throughout the photo shoot the President had a nice smile on his face. Perhaps, people might have departed the event venue with a sense of feeling that the government under this President would deliver what has promised.
However, I thought I must share what have uttered in front of the President with a few of my friends including two senior Ex- Central Bankers. In my statement the main point I made is that the government should appoint officials who have high theoretical and technical expertise for the positions under which especially the macroeconomic policies are executed. Also I gave a hint as to how such individuals could be identified. Do we have such individuals at critical positions of government? Having read my statement one colleague commented as follows:
“I hope President got the message correctly. The current problem in SL under the good governance rule is that leading and critical institutions are headed by people who have little knowledge on the subjects they have to handle and are there on account of their political loyalty or closeness to the top. Their delivery capacity is doubtful…” Is this true? Let me cite only a couple of examples. I feel uncomfortable in writing this against individuals. But I have to be bold here in pointing out this mess on behalf of the country.
Firstly, the central bank governor told that, “Sri Lanka’s currency is now competitive after being floated last month and will support export growth.” He told this to media on Monday of this week as reported by LBO on the same day. What he meant by “Sri Lanka’s currency is now competitive?” I do not know. But what I know is that when a currency is depreciated as rupee had depreciated in past few weeks, the economic description should be “currency is weaker” but since weaker currency sometimes support export growth then it should properly be defined as “competitive in exchange rate” since he was talking about monetary policy not something about currency trade. Let us think that it is a slip of the tongue. But the question is whether the rupee depreciation is something that CBSL had planned or expected. I do not think so because Ravi Karunanayake told a couple of months earlier that the value of rupee would be brought to Rs.130 per one dollar and the opposite of it has happened. Now CBSL governor justifies that what has happened is good. Let us leave it there. But second example is much more dangerous.
This relates to the deputy governor of CBSL. In past three months CBSL has printed money amounting Rs.170 billion. This was a deliberate action on the part of CBSL. The media reported about the printing of money. Now deputy governor Dr. Nandalal Weerasinghe says that, “However inflation remains low and there is no issue of the central bank printing money at the moment despite a high holding of treasury bills and bonds.” (LBO, Sept. 28th) What is this theory and justification? Please notice the words “at the moment” and continue reading.
As far as I know when CBSL print Rs.170 billion, it has the potential to increase the virtual money stock by Rs.1.7 trillion or more (not billions) in near term as the reserve ratio stands at or around 7%. This is why inflation could take place. (Please note that when reserve ratio is reduced the potential for the increase of money stock increases. The relative reverse happens when reserve ratio is increased). It will not first appear as inflation. Perhaps it will first appear as “excessive liquidity” in the financial system then it will translate into “high credit growth” or sometimes both can occur at the same time. Excessive credit growth might increase the current account deficit. It might require the CBSL in increasing interest rates. Perhaps, rate increases will not be enough to contain current account deficit hence rupee will be depreciated continually. Now inflation will set in.
In short, five important parameters might change negatively not “at the moment” but in the near future, perhaps within one year if corrective measures are not taken. Those are (1) low and steady rates of interest, (2) stable exchange rate, (3) optimum private sector credit growth, (4) having managed excessive liquidity effectively, and (5) having a “good cushion” of foreign reserves (I have a different opinion in regard to “good cushion” but it is ignored here for the time being). Now my question to CBSL is this:
Forget about this moment, during the span of next twelve months from now, will the CBSL be able to maintain near steady rates of interest? Will the CBSL maintain stable exchange rate? Will the CBSL be able to maintain the private sector credit growth without administrative interventions such as lowering Loan-to-Value ratio? Will there be no “excessive liquidity” in the system? Will there be an enough cushion of foreign exchange reserve without increasing foreign borrowing limits? I think people deserve answers to these questions right now because monetary policy is not something about this moment.
Let me finish this essay by quoting my colleague once again. He says that, “leading and critical institutions are headed by people who have little knowledge on the subjects they have to handle.” These people can be both elected and appointed officials.