16 July, 2019

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When A Central Bank Governor Speaks Like A Governor

By W.A Wijewardena

Dr. W.A Wijewardena

Dr. W.A Wijewardena

When a Governor speaks frankly, the market responds positively

When a Governor of a central bank speaks like a Governor, he is sure to receive two types of response. His candid speech will build private citizens’ confidence in central bank actions which in turn helps the Government in power to attain its growth objectives. But it could also anger his political masters if they are just concerned with short-term political gains and not about long-term sustainable economic achievements.

Governor Coomaraswamy in the hot seat for being frank and candid

This is exactly what has happened to the Central Bank Governor Indrajit Coomaraswamy who had spoken as the Governor of the Central Bank and not as a politician at the launch of the Central Bank’s Road Map for 2017 a few days ago.

He was praised by the private sector immediately as demonstrated by the supportive press statement issued by the country’s leading business chamber, the Ceylon Chamber of Commerce or CCC. Suspecting moves by the political authority of the day to interfere with the free decision-making process at the Central Bank, it has called the business community to support the Bank’s independence. But Finance Minister Ravi Karunanayake is reported to have expressed his anger at a subsequent media conference at certain insinuations made by Governor Coomaraswamy during his speech.

Unsustainable budget deficits are the cause of macro ailments

Governor Coomaraswamy’s speech in question was candid, objective and impassioned unlike the speeches made by his two immediate predecessors. It did not contain political camouflage, painting a rosy picture about the soundness of Sri Lanka’s economy. He said that Sri Lanka’s economy was sick, in the hospital but fortunately not in the intensive care unit or ICU. He did not blame only the present Government for the malady, but made a general remark that it was all the previous governments that had caused the economy to be hospitalised.

The Government’s policy action, he emphasised, should be proactive and free from short-term political expedience. Drawing the attention of his audience to the perennially worrying twin deficits – deficit on the budget and the deficit on the trade account – which have made the country’s macroeconomy unsustainable, Governor Coomaraswamy revealed a fundamental economic truth as follows: “Unsustainable budget deficits boost excess and untenable demand in the economy. When there is excess demand, it leads to inflationary pressures and higher nominal interest rates in the economy and there is also a higher propensity to import, given the limitations in domestic supply. That in turn, exerts pressure on the balance of payments and the exchange rate.”

Exchange rate depreciation cannot be prevented as long as the Government runs budget deficits

Consequently, the pressure for the exchange rate to depreciate cannot be prevented only through traditional monetary policy. The culprit is, therefore, the unsustainable budget deficits which the governments of the past have been religiously following, sacrificing the long-term sustainable development for short-term political expedience.

Economic reforms are a must

He thus emphasised that economic reforms are necessary but they should be consistent, guided by commitment and focussed on clear outcomes. What he meant by this is that reforms should not be selective, abandoned midway and done half-heartedly.

The cause for the pressure for prices to go up and exchange rate to depreciate had been the large fiscal deficits maintained by all successive governments since independence. The end of the civil conflict, according to Coomaraswamy, has created the best ground conditions for Sri Lanka to move on to a higher growth path. The responsibility of the Central Bank in this context has been to create facilitating conditions for both the private sector and the government sector to seize opportunities and elevate the economy to a high growth path. The country’s sick economy cannot be cured overnight, according to him, and it requires everyone concerned – citizens, politicians and bureaucrats – to take pains.

There must be consensus among politicians and all other stakeholders about the need for cohesive reforms aiming at improving productivity, competitiveness and the business environment. He expressed the wish that when the Government would restructure the Central Bank it would give more powers to the Monetary Board implying that it should give a greater independence to the Bank. According to Coomaraswamy, such moves “would enhance the credibility of the central bank, while preserving the independence it needs to play its roles efficiently”.

Both Governor Coomaraswamy and Minister Karunanayake are for disciplining the budget

Has Governor Coomaraswamy said anything that should anger Finance Minister Karunanayake? No, because the Minister himself has admitted in the past in his budget speeches as well as in public forums that there is an urgent need for consolidating the budget.

One example is the keynote address delivered by him at the Economic Summit organised by the Ceylon Chamber of Commerce in July 2016 in Colombo. He reaffirmed his commitment to consolidate the Budget meaning a number of reform measures being planned by the Government to discipline the budget that has gone astray. Those measures include increasing the revenue, reforming the tax structure, generating a surplus in the current account of the budget now known as the revenue account, reducing the budget deficit progressively and putting a check on the unsustainable growth in public debt.

This summit, attended by President Maithripala Sirisena too, was addressed by Governor Coomaraswamy also on the same line. Hence, this writer, who was a panellist at the forum, praised both the Finance Minister and the Governor for speaking the same language but warned that what is being done by the Minister of Finance should not go against what the Central Bank is doing. For instance, if the Central Bank has adopted a tight monetary policy measure to prevent the economy from getting overheated and thereby exploding eventually by way of continuously rising prices, the Minister of Finance should not loosen his budgetary expenditure programs by giving extra money to the hands of people. It would result in an unwelcome consequence in which the Central Bank would be forced to further tighten monetary policy to arrest the situation. The ultimate result will be that the country would get trapped in a vicious circle of ever increasing interest rates.

The reason for the dispute may be a power struggle

It, therefore, appears that the cause for the dispute has been that the Minister wishes to control the Central Bank just like another department of the Treasury and the Monetary Board led by Governor Coomaraswamy has resisted that move.

This is not a salutary development since both the Minister of Finance and the Central Bank should work together by coordinating the actions which they plan to implement. The Minister should appreciate that an independent central bank serves the Government better in its present drive for joining the rich country club within a single generation, the avowed goal of the present as well as the past governments.

Even a diehard socialist like Dr. N.M. Perera recognised this need when he was the Finance Minister during 1970-75. Addressing senior central bank officers in 1971, NM is reported to have said that the central bank should submit its reports without political colours and he would appreciate them only if they were dispassionate and objective. It would certainly behove the Government led by a liberal like Prime Minister Ranil Wickremesinghe to appreciate the wisdom so expressed by this socialist Finance Minister.

Erosion of Central Bank independence by the previous government

However, the developments that have taken place since 2005 have been to the contrary. The previous administration led by President Mahinda Rajapaksa had compromised the Central Bank’s independence continuously prompting the critics like Dr. Harsha de Silva, an independent economist at that time and a Deputy Minister in the present Government, to blast the Government and the central bank management.

Hence, when the new good governance Government was formed in 2015, all the expectations were that it would respect the central bank’s independence. In fact, the first economic policy statement delivered by Prime Minister Ranil Wickremesinghe in Parliament in November 2015 promised this. But the subsequent actions of his Finance Minister were to the contrary as highlighted by this writer in three previous articles in this series.

The first attempt by Minister of Finance to compromise central bank independence

In the first article published in August 2016 under the title ‘Be Warned! Monetary Board is losing its power as well as its independence’, this writer drew the attention of the Government to two unsavoury measures which the Minister of Finance had proposed which fell within the legitimate scope of the Central Bank.

One was the move by the Minister to introduce a national payments gateway outside the Central Bank; the other was a proposal to form an advisory group within the Ministry of Finance to address the solvency issues of banking institutions. Both these functions have been handed to the Central Bank by Parliament for valid reasons and the Minister of Finance cannot encroach into them at his discretion.

Attempts in Budget 2017 to take over certain central bank functions

The second article published in November 2016 reviewed the budget 2017 presented by Minister of Finance to Parliament and opined that the Budget was a forward measure if not for the proposals by which he had attempted to acquire the legitimate functions of the Central Bank.

There were seven such unsavoury interferences compromising the independence of the Monetary Board proposed by him in the Budget as described in the article under reference as follows:

“The Budget 2017 has also sought to encroach into the functions of the Monetary Board of the Central Bank of Sri Lanka by proposing certain proposals coming within the purview of the Monetary Board. This is against the objective of creating the Monetary Board and the Central Bank by Parliament in 1949. That objective was to allow an independent Monetary Board to manage the country’s monetary and financial systems, free from intervention of politicians or outside parties. These two functions are too precious to be left to the politicians who have personal agendas. Hence, the Monetary Law Act MLA made provisions to safeguard the position of Monetary Board members; once appointed by the President on the recommendation of the Minister of Finance and in consultation with the Constitutional Council, they cannot be removed while they hold office at the whims and fancies of the Minister of Finance. If he desires to do so, there is a specific procedure stipulated in MLA.

“Further, unlike the other public sector corporations and institutions in Sri Lanka, the Monetary Board is the only entity to which the Minister of Finance cannot issue general or specific directions. However, if there is a dispute between Monetary Board and the Minister with respect any particular desire of the latter, the Minister could still have his say being carried out by the Board by issuing a directive in writing to the Board in terms of section 162 of MLA. But, when he issues this directive, he has to inform the Board that the Government will take full responsibility of the consequences of carrying out that directive. This provision was used only on one occasion in Sri Lanka through the history of the Central Bank. That was when Prime Minister Wijayananda Dahanayake issued a directive to the Monetary Board to reduce interest rates in 1959 so that he could win the forthcoming Parliamentary elections. In the subsequent election, the Government took full responsibility for the consequences of reducing interest rates, because his government was thrown out and he himself lost his seat in Parliament. Hence, a Minister of Finance should not take this golden provision in MLA lightly.”

All these functions had been assigned to the Central Bank by Parliament by enacting special legislations and it was emphasised that the Minister should not seek to take them away from the Central Bank without going back to Parliament.

Civil society should help Central Bank to preserve its independence

The third article published in December 2016 under the title ‘ Reform the Central Bank but don’t erode its independence’ cautioned the Government that the way the Minister had proposed to reform the Bank would result in eroding its independence, an objective which the Prime Minister too had outlined previously when he presented his first economic policy statement a year ago. But the Minister or the Government does not appear to have taken these warnings seriously. Hence, it is up to civil society now, as had been voiced by CCC in the press statement quoted above, to come forward to defend the Central Bank. The Monetary Board or the Governor alone cannot do that job without such support.

Expressing professional views is not a sin

Governor Coomaraswamy cannot be faulted for expressing his professional views on the economy candidly and frankly. The Government led by Prime Minister Ranil Wickremesinghe will benefit immensely if it has the patience and wisdom to listen to this professional.

*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

  • 7
    1

    The present Governor said: The economy is “hospitalized” but not in the “intensive care unit” (ICU). What was the response of the Minister of Finance. He (Mr. Ravi Karunanayake) said the Governor of the Central Bank is only a “Hospital Attendant” and in short questioned his credibility and capability in making an assessment of the economy of the country. This verbal confrontation directed at the very “High Command” of the major Financial Institution of the country, that formulates, executes and monitors the whole of the economy of the country is uncalled for and highly damaging. Did a very responsible Minister,such as the Minster of Finance realize the gravity of his statement in referring to CB Governor as a “Hospital Attendant”? Does he not know the rippling effect and repercussions it would have in the minds of local citizens, Business Community, Banking Sector and the international community? This unwarranted confrontation, I believe, is a sequel to the turf war that exists as a result of the “Bond Scam” and the consequential non appointment of the previous Governor. What a set of incongruent Ministers we have in the Cabinet and what progress this country could expect?

  • 7
    0

    Interference by Unqualified Politicians, during the last 30 Years of Sri Lankan Government, is the reason for Efficient Public Servants Leaving the Country, in Droves.

    This leaves the Public Servants who are Willing to Toe the Line of Bribery and Corruption with the Politicians, in Charge of Development Projects!

    A Sad Situation for Sri Lanka!

    • 1
      0

      Hamlet
      Couldn’t agree with you more.Very true.

  • 4
    1

    So we are expecting our white collar racketeer Ravi to back off and allow what’s best for Sri Lanka and her average citizens, to prevail. Are we all becoming dumber by the day?

  • 0
    2

    I thought he is a just “Kanakanama”..( Hospital Attendant) !!!!

    Did Mr Wijewardana run this past the Best Fianance Minister in the World, Mr Ravi Galleon Karunanayaka, who has turned around our Economy and has liberated the PAYE Yahapalana Suckers from stifling Chinese Debt…

  • 2
    2

    There are good Debts and there are bad Debts.

    PAYE Yahapalana suckers by now should know what they are, specially after FIL & SIL made another walloping LKR 6.2 Billion for the 6 months from March to Sept 16.

    Mr Wijewardana blaming the previous government for borrowing to build the few major Infrastructure assets is laughable.

    Airport, Harbour, Power Station and the Highways are the only descents Infrastructure we have now.

    The previous Regime should be thanked for building these invaluable assets which will serve not only the present generation, but many many more going forward.

    These assets were built despite enormous hardships which were imposed by the LTTE mates who are anow Yahapalanians, and their Western backers.

    Batalanda Ranil’s UNP Government is using them now to now re jig the Debt and make commissions for the UNP financiers and supporters.

    Or sell them outright to mates, again to collect with massive commissions.

    250 Acres of Govt land in Kurunegala to Ghana mates and another 100 Acres to another dude to build Italian Tyres are classic examples, along side collecting USD 100 Mil from selling 15 thousand acres to Hng Kong Chinese.

    Our rural folk who didn’t know sovereign bonds from Jamis Banda, now talk about them, after Ranil used the CB to make the Diaspora Mahendran and SIL billionaires overnight.

    People who have even a little knowledge about politics and finances in the West know that Suddas won’t give money for nothing.

    They never give money to build Harbours or Airports or Highways or power stations.

    They only give money to the NGOS .

    WB, IMF, and even ADB throw in a few crumbs , but they hurt the majority who are the poor and the under privileged in the process.

    Dr Coomarasami’s lecture on Economics is good.

    ut BBatalanada Ranil’s Folks Wagon assembly is a good example of how this Yahapalanya is going to develop this country.

  • 2
    1

    Dr. W. A. Wijewardena is a specialist in his subject and mortal beings like us may not understand the fullest gravity of his statements.

    However, as seen in many counttries, the best practise is for the Central Bank of the respective country to perform the regulatory tasks in running the economy where non-state actors are the engine of the economy. Hence there should be an honest leadership of the Central Bank with a vision identifying what is good for the country and should enforce regulatory standards free from interference, especially political.

    If we have a number of so called independent institutions where the Constiutional Council appoints them, why can’t the top notch appointments of the economic regulator be the same? Alas! some of the recent selections by the Constiutional Council too are not entirely free from controversy and merit.

  • 2
    1

    Some things that are better discussed in private before going public.
    When going public, there are civilized and less civilized ways to express views.
    Personalizing issues is not good governance.

    Politicians are used to mud slinging and that is best limited to their parliamentary playpen.
    The Governor is witty enough to pay back the Minister in his own currency, but if he indulges where will it take the CB?

    The Minister not long ago provoked an ambassador only to be humiliated in public and in private.
    Childish conduct (like burning documents in the chamber of the parliament some years ago) may impress the party boss and supporters, but does no good to democracy.

    The main question is the independence of CB. If it cannot be independent, there is no need for such an institution. The Treasury can take over the job.

  • 2
    1

    All these remarks proves that Ministers are stupids and rogues. They think that when they do conspiracies in the secret with RW & MS, people would not know. People know very well that Bond scam was carried out by RW to use for political activities. MR too robbed Billions for his camp and for their tamasha’s. As JVP had pointed out, all these are public funds. Who the hell are the parliamentarians to use public funds in this manner? Who gave them such powers. Certainly these actions infringe the sovereignty vested with the citizens and hence there is a serious violation of the fundamental rights of the people. Also parliamentary actions as such cannot be regarded as done in the interests of the people. This only proves that Rohana Wijeweera and Prabagharan was right and not the Parliamentarians.

  • 0
    10

    Yep! Coomarasamy, in hushed and holy tones, and in typical Hindoo fashion, speaks like the governor of Obama-USA. Or of Hindoo caste-centered India : Build up moneyed business community, make them the new high-caste (time to start caste system from scratch), and let the money trickle down to the new caste of Lankan masses, is the motto.

    3,000 years of egalitarian Buddhism is to be no more. High caste according to those who did not kill animals and tilled the land for sustenance is soon to vanish.

    Such is/always was, the UNP policy.

    Idiots! Don’t they realize that US destroyed her farmlands after they killed off their ancient native Indians, cannot grow anything on their barren soil, and thus can only do trade and commerce, and force other countries to uphold the very same system?

    And bloody India, in great selfish stupidity of their high-castes, sucks directly into the Obaman-American system. Thank God Trump is attempting to place a new global value on money (even if it mean a few casinos), and will probably build up the American farming community from the heart of the American masses!

    • 6
      0

      ramona grandma therese fernando

      You have a serious problem, it is you.

      “3,000 years of egalitarian Buddhism is to be no more. High caste according to those who did not kill animals and tilled the land for sustenance is soon to vanish. “

      Read:

      Digging up Madurai’s Sangam past

      http://www.frontline.in/arts-and-culture/
      February 19, 2016

      Keezhadi treasures caught in a swirl
      January 20, 2017
      frontline.in/the-nation/

      At Keezhadi site a terracotta drain pipe found broken at two places. Three types of drains were found in the excavation: open drains lined with bricks, closed drains boxed with bricks, and terracotta pipe drains. Some of the drains led to soak jars, indicating the use of advanced sanitation methods

      Kaddukkarai Archaeological studies which have ventured into a new path towards Misted Ancient History of Northern Sri Lanka – Tamil Diplomat

      http://tamildiplomat.com/kaddu kkarai-archaeological-studies

      You should discuss Keezhadi treasures with De Silva. Ranjith, Siva Sankaran Sharma. Vibushna, ……. rest of the stupid racists in this forum.

      • 0
        3

        Native Vedda,

        Pyramids of Egypt had similar structures for the 0.001%, whist their slaves dug holes(Hindu masses never did that, though). Buddhist Anuradhapura had good functional systems for the masses. Yes, Comarasamy might do some ingenious thing, but it won’t be for the masses.

    • 1
      0

      RTF
      This is serious business.

      The MAD magazine is still in circulation, but it is too serious for your kind of frivolous stuff, they carry witty stuff.

      Do not worry, we will find something appropriate soon.

  • 2
    0

    An outstanding brilliant man all Sri Lankans could be proud of . How long he can survive with a bunch of corrupt politicians only time will tell .

    • 0
      2

      Isn’t he the second pick.????

  • 2
    1

    Yahapalan Finance Minister Galleon Ravi made a serious allegation that a former CB Governor allowed the previous Regime to print LKR 13.5 Billion in 5000 Ruppiah Bills and take them away.

    This was in a response to the looting of the LKR 20 Billion of Tax Payer money by the Singaporean CB Governor and his SIL.

    This Governor denied the Galleon allegation, soon after he got the gig.

    The Governor told the media that he looked at the books and couldn’t find no such pilfering..

    But Galleon didn’t withdraw his allegation.

    Now Dr Samy says he is going to have another checking of the books.

    Even in 5000 Bills, LKR 13.5 Billion work out to thirteen thousand five hundred pieces of paper.

    How did Cabral do this without any trace?.

    Will Galleon resign if is is found to be telling Fibs?.

    Or will Dr Samy do the same?..

    • 1
      0

      KASmaalam K A Sumanasekera

      Did you really listened to the entire presentation by Central Bank Governor? Which part did you really understand?

      I ban you from crab walking.

  • 4
    0

    One of the biggest mistakes this government did was to ap[point the incumbent as the FM.He is an accountant businessman.He is not an economist. As most of the politicians his ego goes sky high.He proved the incapability of producing balanced budgets twice. It is alleged that concession adding to millions were given selectively to parties like motor vehicle importers resulting loss of considerable revenue to the government/people.He is only a commoner politician and a mediocre. This man should not interfere with the CBG who is trying to do his job professionally and independently as expected. The politicians of all hues are used to having suckers of many types. Some are imported like the former CBG who eventually played out te country for billions as established by investigations.He with this monumental crime is still able to roam free and still hold high positions ion this country with the blessing and shelter of a highest political authority. The present CBG wouldn’t have been in his seat if not for the insistence of the President.It ids all a clique. No matter what happens to the country or the people. Congratulations to the Governor.You have nothing to loose but your self-respect and esteem which you have earned. Do not tolerate nonsence. People will be with you.

  • 3
    0

    Very good and timely article by Former Governor W.A.Wijewarndene. In many countries Central Bank’s function independently without any political pressure or interference. Political party’s has no say in Central bank’s function (E.g. Australia). Governor’s appointments are also done based on merits. Fortunately this time Sri Lanka was able to get an experienced, talented Governor from the industry itself.

    Politicians taking over direct or indirect control over Central Bank will lead the country to disaster, which has happened in past. During that time, no one believes statistics released by Sri Lankan Central Bank.

    Sri Lanka’s credibility depends on the independence of the Central Bank and credibility of the statistics released by Central Bank.

    Sri Lanka this time has a professional qualified accountant(FCMA) as Finance Minister. He should take consultative approach with Central Bank to uplift the country’s economy.

    • 7
      0

      I agree that Ravi Karunanayake, FCMA, is more qualified than SOME of the Finance Ministers whom we have had – but talking about “qualifications” can be misleading, and also there HAVE been quite a few people with impressive qualifications:

      https://en.wikipedia.org/wiki/Minister_of_Finance_(Sri_Lanka)

      For instance, J.R.Jayawardena, Dr N. M. Perera and Ronnie de Mel.

      “Economics is a pretty complicated subject, I believe – and I don’t understand much of it! It seems to me that Nobel Prizes are awarded for only six disciplines, and Economics is one of them:

      https://www.nobelprize.org/nobel_prizes/lists/all/

      Mr Sathie Ponnambalam, you ARE an accountant, so I hope you don’t mind my saying that it is often said that accountants perform mechanical chores, and lack imagination. Every profession has its “occupational hazards”! A Doctorate or even a good First Degree in Economics is said to lead to a deeper understanding of HUMAN needs and values. Of course there’s nothing to preclude an accountant, or indeed any human being, from having such qualities: the correlation between qualification and understanding can be pretty low.

      I’m afraid that Ravi Karunanayake is politician more than academic or humanist. I’ve listened to the full 70 minutes of Dr Indrajit Coomaraswamy’s speech. He has clearly indicated that he thinks that he has very definite powers, and he WILL exercise them to the full. I’m NOT surprised that Ravi K. is mad about the authority with which Indrajit speaks, while being correctly polite in his references to the Minister. The Minister is NOT regarded as “Master”; and the Governor is not a servile lackey.

      The honesty and independence of this Governor of the CB is one of the few silver linings at the moment. One can’t help feeling that it is Indrajit’s impeccable pedigree that allows him to speak like this (I’m quite aware that the words I use are “dangerous”), but it is also a possibility that if the independent line taken collectively by the CB staff is not respected, Indrajit will just chuck up, and go back to his simple unpretentious life-style.

      You see him gulping half a tumbler of water; I have been reliably told that water is the only liquid that he imbibes. So let us label the guy as eccentric for drinking neither the tea nor the coffee that Sri Lanka produces, but do all that we can to cherish this fine man.

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