Central Bank’s independence

It was an early morning call that woke me up on Thursday. It was Ruwanputha, the young economist, calling. “Did you read the latest news,” he asked. “About what,” I queried. “Well the chairman of the National Police Commission has gone and welcomed former Minister Basil Rajapaksa at the airport. That isn’t the right thing to do for the head of an independent commission,” he said.

“What you say is interesting about independent institutions. The other day (on Monday) the Chamber of Commerce had commented on the independence of the Central Bank,” I said. “What would be the provocation for this?” he asked. “Well not sure, let me check and get back to you,” I replied. I did a little digging. Chamber officials were tight-lipped as to the reason for issuing this rather strange call where the chamber had urged the government not to interfere in the workings of the Central Bank and allow its independence.

It was at this point that I recalled another unusual statement in Parliament by MP and UNP Chairman Vajira Abeywardene where he had criticised the Central Bank for not working in tandem with the government, saying that the banking regulator should toe the government line.

This was what would have prompted the statement from the chamber.

“The Ceylon Chamber of Commerce is firmly of the view that institutions like the Central Bank of Sri Lanka should be allowed to function independently in performing its mandate as in most other countries, particularly at this stage when the country is grappling with a major economic crisis,” the chamber statement said.

It also emphasised the need to reintroduce the Central Bank Act which was proposed in 2018 when the current President was Prime Minister, to enable an independent Central Bank, prioritise price stability and limit the monetisation of the fiscal deficit, adding that there was a need for a strong and independent Central Bank which is paramount in driving Sri Lanka’s economic revival.

There have been delays in reconstituting the Constitutional Council (the Parliamentary Speaker said this week that this was being done). The council is responsible for the establishment of independent commissions like the Election Commission, the National Police Commission, the Audit Service Commission and the Human Rights Commission which are functioning but would have to be reconstituted once the Constitutional Council is re-established. The Central Bank doesn’t come under the ambit of this council.

The independence of the Central Bank has been a perennial issue in recent times. There were times the Central Bank itself stepped out of its boundaries and resorted to controlling the boards of commercial banks. For example, the heads of some of these private banks were ‘installed’ by high powered officials, while funding for various government projects also came from directives at the top of the banking regulator.

The Central Bank’s first-ever Governor in 1950, John Exter said in a report in 1949 creating the establishment of the Central Bank of Ceylon, that a central bank influences the economic life of a nation principally by monetary action. “While such action can be tremendously effective under certain conditions, its limitations should be frankly recognised. This through its control of money, the central bank can assist but by no means ensure, the achievement of the above objectives,” he said.

Retired Deputy Central Bank Governor and now popular columnist Dr. W.A. Wijewardene dealt in detail on the independence of the Central Bank during a speech he made at this institution on August 28, 2018.

This is what he said: “Unbiased, impartial and objective advice. Central bankers should demonstrate this wisdom in all their dealings, both within and outside the bank. The wisdom to be demonstrated should be unbiased, impartial and objective without being coloured by different political hues, as advised by one time Minister of Finance, Dr. N.M. Perera to senior central bankers when he met them in 1971. It is reported that Dr. Perera had said that the bank ‘should make independent reports on economic subjects to the government and not report merely to suit the political complexion of the government in power’ and that ‘he would value reports (of the bank) made dispassionately and objectively’. Such dispassionateness and objectivity come only from independent minds.”

He said: “… in today’s context, the secretary to the Ministry of Finance sitting on the Monetary Board is not an independent member. He is a public official who will seek to lead the Monetary Board in accordance with the wishes of the Minister of Finance. Hence, a serious question has arisen today with respect to the independence of the Central Bank.”

The Human Rights Commission (HRC) is one of the few institutions that is truly independent. It has been critical of state and police action against those engaged in recent protests. Most likely in the reconstitution process – after the Constitutional Council is re-established – new faces would be brought into the HRC instead of continuing with the same set of officials who have done a great job in ensuring the independence of this institution.

Recently the Business Times reported about over 200 audit reports presented by the Auditor General exposing corrupt practices, financial misappropriation and irregularities of state institutions but that no action was taken against the culprits due to the inaction of the Audit Commission.

Among these reports, were findings of massive financial misappropriations and irregularities in recent mega transactions in the import of essential commodities causing a loss of more than Rs. 40 billion to government coffers, the newspaper report revealed.

Coming back to MP Abeywardene’s statement in Parliament, the question is whether such a strong comment was made with the endorsement of the President, the leader of the UNP and also the Minister of Finance.

As I reflected on these disturbing developments regarding the Central Bank, my attention was drawn to the margosa tree conversation.

“Meda peradigen mae davas wala apiwa kanassallata path karana wartha enawa ape sahodariyan gena (There are worrying reports of our sisters working in West Asia facing serious problems),” said Kussi Amma Sera.

“Eh raksha hoyala dena niyojithayan egollanta kiyala thiyena nisa rakshawal aniwaryayen thiyenawa kiyala, sancharaka visa walin gihama (That’s because employment agents have told them that they were assured of a job by going on visit visas),” noted Serapina.

“Aney, aththamada? Mae niyojithayanwa dedi lesa danduwam kara uthui (Seriously? These agents should be punished severely),” added Mabel Rasthiyadu.

Kussi Amma Sera brought in my second mug of tea saying: “Ape meda peradiga inna kanthawo godak getalu walata muna denawa (Our women in West Asia are facing many issues).”

I nodded absent mindedly as my attention was more focused on a delicate balance between the Government and the Central Bank in ensuring that the latter has the independence it deserves without state intervention and interference.