Eminent economist advocates CB’s independence devoid of political influence

The Central Bank should maintain its monetary policy prudently protecting its independence while preserving accountability but if it uses its monetary authority recklessly to satisfy irresponsible political leaders the end result will be disastrous, an eminent and veteran economist said in Colombo.

Delivering the public oration on Central Bank Independence, former Central Bank Governor Dr. W. A. Wijewardena told a gathering of officials including bankers last week that the people’s money will become worthless and they will lose everything they have if the monetary regulator tries to please political masters.

However he noted that central bankers should tolerate the pressure coming from political authorities but, most of the Central Bank governors have to sacrifice their jobs because they have defied the request and pressure coming from the government.

“Therefore it is essential to have both conservative officials as well as peacemaking heads to maintain Central Banks continuity,” he added.

Dr. Wijewardena further stressed the importance of maintaining a cordial relationship between the government and the Central Bank as these two main branches have been created by the society, by the nation to assist the people.

Hence, they have to respect each other, at the same time they have to appreciate each other. It is just like the relationship between the “husband and wife”. They have to work together for the welfare of the nation, he said.

The central bank should be accountable to the nation. In modern central banks this accountability has been ensured by having special provisions of disclosure, special provisions of transparency, special provisions of explaining what the central bank is doing at various public bodies and so-forth, Dr. Wijewardena said.

He disclosed that the new Monetary Act which is being devised by the Central Bank would be taken care of by the accountability function.

“In the case of most of the banks - Bank of Canada, Reserve Bank of Australia and New Zealand which have gone into inflation targeting today which the Central Bank of Sri Lanka is planning to implement, they have to explain why they go for inflation targeting to a parliamentary committee and the benefit for society of maintaining inflation at a lower level.”

“At the end of the year we have to again explain why they have failed. So that has to be maintained by Central bank of Sri Lanka. And with the new Monetary Act,” he said.

The Central Bank’s independence is the independence of the citizens from undue interference from politicians who desire the bank to print money and help them finance budgets.

This printed money will basically have to be allocated for unproductive purposes in the absence of a mechanism for deciding on priorities in the economy. In the long run, the country is engulfed with inflation where all citizens have to bear the cost, he added.