When a Governor speaks like a

Governor.....

Central Bank Governor Dr. Indrajit Coomaraswamy

Monday, 9 January 2017

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
Banks Road Map for 2017 a few days ago (excerpts of the Road
Map available at: http://www.ft.lk/article/589325/Road-Map:Monetary-and-financial-sector-policies-for-2017-and-beyond ).
He was praised by the private sector immediately as
demonstrated by the supportive press statement issued by the
countrys 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
Banks independence (available at:
http://www.ft.lk/article/589805/Ceylon-Chamber-calls-on-bizcommunity-to-support-CBSL-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 (available at:
http://www.dailymirror.lk/article/Ravi-calls-CB-Governor-a-hospitalattendant-121750.html ).
Unsustainable budget deficits are the cause of macro
ailments
Governor Coomaraswamys speech in question (available at:
https://www.youtube.com/watch?v=tkJ2soMoO8w ) 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 Lankas
economy. He said that Sri Lankas 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 Governments 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 countrys 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 countrys 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 (available at: https://www.youtube.com/watch?
v=VDTDhPY2xv4&t=4s ).
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
Banks 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 banks 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 (available at: http://www.ft.lk/article/562766/Bewarned--Monetary-Board-is-losing-its-powers-as-well-as-itsindependence ), 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 (available at:
http://www.ft.lk/article/580074/Budget-2017--Significantimprovement-if-not-marred-by-policy-inconsistencies-and-

interference-with-the-Monetary-Board).
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 countrys 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 dont 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 (available at:
http://www.ft.lk/article/586305/Reform-the-Central-Bank--but-dont-erode-its-independence ). 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)
Posted by Thavam