Clash of the Titans

Kussi Amma Sera ran into the garden, newspaper in hand, and headed towards the margosa tree where Serapina and Mabel Rasthiyadu had gathered for their morning chat over tea.

“Balanna Akke, loku prashnayak thiyenawa Jordanaye, ehe weda karana ape lamaita (See sister, there has been a big problem in Jordan concerning our migrant workers),” she said, reading aloud from the newspaper which referred to an incident where tear gas had been fired at a group of Sri Lankan migrant workers.

“Meka hari bhayanakai (This is terrible),” exclaimed Serapina, “me lamai ehe hariyata duk vindinawa. Den kandulu gas walatath muhuna denna wela thiyenne (These girls are suffering there and on top of that had to face a tear-gas attack).”

“Mekata wagakeema ganna une jordanaye ambassiya. Ethana inna adala loku kattiyata viruddawa katauthu karanna avashyai (The embassy in Jordan has to take responsibility for this and action has to be taken against the relevant embassy officers concerned),” noted Mabel Rasthiyadu.

According to reports from Jordan, some officers from the embassy had gone to the factory where the Sri Lankan workers were employed but had lost their jobs owing to the COVID-19 pandemic. Unable to solve the crisis, an ugly situation had arisen between the protesting workers and embassy officials which led to tear gas being fired by Jordanian police.

As I listened to their conversation from my office room window the phone rang. It was Kalabala Silva, the often agitated academic, on the line.

“I say…..hello. Did you hear about the conflict between the Central Bank and the Treasury? There seems to be disagreement between the two parties,” he said.

“Yes, there have been some issues between the two,” I said, adding that it was to do with the demarcation of roles between the two institutions which is blurred today.

Indeed as we continued our chat, I recalled a conversation (in this column a few weeks back) where it was stated that while the Treasury was insistent on printing money to lend to the market to stimulate the COVID-19-hit economy, the Central Bank was opposed to the plan and recommended that banks should use their own liquidity to lend to the market with a credit guarantee from the banking regulator. Adding fuel to the fire was the criticism levelled at the Central Bank by President Gotabaya Rajapaksa over delays in the stimulus package.

Indeed, as Kalabala stated, the clash of interests between the government and the Central Bank borders on the role of the banking regulator in being responsible for monetary policy formulation (setting interest rates, ensuring money supply) while the state/Treasury deals with fiscal policy (imposition of taxes, etc., for expenditure and revenue).

This is a perennial problem – pressure on the Central Bank (CB) by governments to resort to fiscal measures through raising money – and to some extent would have been resolved had the government gone ahead with proposed amendments last year to the Monetary Law Act which would have established the CB’s independence and operation as an autonomous body.

Then CB Governor Dr. Indrajit Coomaraswamy, while addressing a public forum, said that under the amendments a Monetary Policy Board would be formed comprising economists. This body would be responsible solely for the monetary policy formulation of the CB and neither the Treasury Secretary nor any member of the Government would be a member of this board, establishing the CB’s independence in deciding on monetary policy. Currently, the Treasury Secretary and two other government nominees are on the Monetary Board.

Some weeks back, two members of the board – appointed by the former regime but with wide experience in banking and economic matters – were directed to step down and replaced by a retired CB deputy governor and a businessman.

According to senior economist W.A. Wijewardena, who is a retired CB deputy governor, politicians have forgotten the principles and values of this institution. “The Central Bank is not for politicians to play around with but for the people,” he says.

Indeed, he alluded to CB independence and its erosion as an independent body during a speech at the CB on August 28, 2018. Here are some relevant excerpts of his speech:

“The main stakeholder of a central bank is the public who holds on to the entirety of money it has created prudently or otherwise. Hence, the obligation of the Governor and the board members is to the public and not the political masters who have appointed them to their respective posts. They hold those positions as trustees and not as owners of central banks.

“Central bankers should be unbiased, impartial and provide objective advice. A one-time Minister of Finance, Dr. N.M.

Perera once said 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’.

“Ever since central banks have been created to produce money through a centralised mechanism, their independence had been a subject of issue coming up, again and again. This is because a central bank today produces money out of nothing as if a magician produces a rabbit by waving a magic wand. This money has no intrinsic value of its own.

“Money printing by a central bank is not evil at all times as popularly believed by many. The problem arises if a central bank produces more money than necessary. A central bank is required to play the game of money printing according to a set of prudent rules. If it does so, it can earn the trust of the people. If it does not, it loses their trust as well as its ability to get people to accept the money it produces. As such, a central bank should have freedom to decide how much money it should produce without the interference of outside parties.”

One of the problems in the current clash of the titans is the non-functioning of Parliament and the desperate need by the government to raise money particularly to stimulate an economy dented by COVID-19. According to economists, in the period January to May 2020, the government borrowed Rs. 1 trillion from the banking system which in other words means money printing.

In recently reported comments, CB Senior Deputy Governor Dr. Nandalal Weerasinghe said that because there is no Parliament, the Treasury has difficulties (in raising money). “So, the Central Bank is firing all guns and the Central Bank is going beyond our mandate and not only providing monetary stimulus but also part of the fiscal stimulus now being done by the Central Bank,” he has said.

As I wound up the column for this week, sipping my second cup of tea, I realised that this is a grave problem that would never be resolved particularly since there is no balance between government spending and revenue collection. As long as there is a disparity between the two, the government will always push the CB to raise money on its behalf to fund spending, often excessive spending.