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Central Bank Road Map-2017, Free download pdf, from here>>>
https://issuu.com/m.r.mohamed/docs/cb-roadmap
More reading: http://www.dailymirror.lk/article/Central-Bank-unveils-monetary-and-financial-sector-policy-road-map-for-and-beyond-121676.html
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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)
Central Bank Road Map-2017, Free download pdf, from here>>>
https://issuu.com/m.r.mohamed/docs/cb-roadmap
More reading: http://www.dailymirror.lk/article/Central-Bank-unveils-monetary-and-financial-sector-policy-road-map-for-and-beyond-121676.html
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