Governor of the Central Bank – Why the Crisis?
Posted on July 10th, 2016

Mano Alles Retired Banker Courtesy The Island

The dignity and the position of a Governor of a Central Bank has been brought to its lowest level as the Legislators have been embroiled in arguments on certain ethical issues relating to the previous holder of the position of the Governor of the Central Bank. Some political parties and prominent civil society activists in the country had also expressed opposition to the reappointment of the previous Governor based on investigations of certain alleged fraudulent actions of the then Governor.

It is not our concern whether the former Governor was guilty of a fraudulent action or not because the Monetary Law Act and other Laws in the country provide the procedures to investigate such matters and if proven, appropriate action would have to be taken. Hence it is confusing, to state the least, the relevance of an investigation by COPE (Parliamentary Committee on Public Enterprise).

Dr. Indrajit Coomaraswamy
Governor of the Central Bank

Our main concern, however, is the complete erosion of the independence of the Central Bank and increased political interferences not only in appointing the Governor but also in all aspects of the activities of the Central Bank which has led to the present situation.

Central Bank of Sri Lanka has been established to act as an independent body which was not supposed to come under the Ministry of Finance or any other ministry. It is relevant here to quote John Exter who was the expert retained by the then Government of Sri Lanka to establish the Central Bank of Ceylon (Sri Lanka).

“From the government point of view a central bank is basically an independent, regulatory, and supervisory agency of a type which has become increasingly common in many countries of the world in recent years and in connection with which there has grown up a whole body of administrative practices and political conventions. Central banking embraces problems which are of an unusually technical nature and which require a degree of expertness and specialization not often demanded of Government officials. Also, the administration of a central bank must necessarily be promptly adapted to economic conditions which change rapidly. From the economic point of view, a central bank puts the government into the business life of a country at especially critical points—namely, banking and other credit activities, capital markets, foreign exchange markets, and the supply of hand-to-hand currency. There is a very wide area in which the regulatory functions and business activities of a central bank are nonpolicy- making in character. For this reason alone it would be desirable that central banks should be non-political and should have a considerable amount of independence.

There are, however, many important problems of monetary policy, especially those relating to fiscal policy, on which a central bank must necessarily work in close harmony with the government. On such problems experience in many countries has shown that a central bank with a degree of independence of the government proper can make economic analyses and hold views which are more detached and objective than those of a government department.

Many governments have learned to value and to use the sort of independent and objective advice on monetary and other aspects of economic policy which central banks have been able to give.”

However, to the detriment of the country and to the dignity of the position, over the last two to three decades, the successive Governments in Sri Lanka have progressively run down the institution. During the last regime, politicization of the Central Bank was carried out to the extreme with impunity. The Governor and consequently the Central Bank became just a pawn of the political leaders in power. As someone has said the Governor was engaged in all kinds of activities but central banking; these were often seen to be dictated not only by the political authorities but even their family members. Central Bank which is supposed to give independent and detached advice to the Government on economic and monetary policies did not do so as they, themselves were involved in the initiation and implementation of many of these activities!

To our dismay, the present Government is also seen to be following the same trend:

* First, the Government has diluted the functions of the Finance Ministry/Treasury by taking away an important segment including banking sector.

* Then, the Central Bank has been placed under a separate ministry supervised by the Prime Minister. We cannot understand this as the Central Bank was not supposed to be under the control of any Ministry;

* Prime Minister himself violated the independence principle advocated by John Exter and laid down in the MLA which established the Central Bank.

These actions have weakened the relationship that ought to exist between the Government and the Central Bank. It is necessary to point out that while the most important representative of the Government on the Monetary Board is the Secretary to the Ministry of Finance when this particular subject has been taken out of the Ministry. it is hilarious that the Central Bank Governor submits its Annual Report to the Minister of Finance as per the MLA but the relevant subject is no longer comes under the Minister of Finance.

In these matters it is relevant to quote John Exter:

“The ideal which it is hoped that the proposed law will achieve is one in which there will be continuous and constructive co-operation between the Monetary Board and the Government. The principal instrument for achieving this co-operation should be the Permanent Secretary to the Ministry of Finance whose membership on the Board will ensure at all times that his Minister’s views will be made known to the other members of the Board. The effectiveness of this cooperation and co-ordination between the Board and the Government will depend more upon the men occupying the key positions at particular times than upon any legal formula, no matter how carefully or elaborately it might be worked out. A relationship as complex, and sometimes as delicate, as this one is certain to be, cannot be established full-blown by a piece of legislation. It must be the result, as in other countries, of years of experience and the slow growth of political conventions.

One further point is well worth making. There is a clear need in Ceylon for some sort of economic council at Cabinet level to achieve improved co-ordination of Government economic policies. If in future such a council is set up it is suggested that the Governor of the Central Bank should have a place upon it.

Similarly the present Government is also using the Governor for non-central banking activities thereby hindering him to give independent and detached advice on related economic policy issues. We are however relieved by the fact that the present Governor is not being used to canvas international sports activities to be hosted here in Sri Lanka as was done in the past!

It is interesting again to note what John Exter had to say on the position, appointment and the role expected of the Governor of the Central Bank.

“Although the ultimate authority rests in the Monetary Board, the draft law nevertheless recognizes need for a strong chief executive for the Central Bank. Accordingly, the Governor is made the Chairman of the Monetary Board, and is given control of the agenda for its meetings. He is to be responsible for the execution and administration of policies and measures adopted by the Monetary Board, for the direction, supervision and control of the operations of the Central Bank, and for its internal management and administration. He is to be chief representative of the Bank in its relations with outside persons, including the Government and its agencies, foreign governments and their agencies, and international financial and other institutions. He will be required to devote his full professional time to the business of the Central Bank. Since the other two members of the Monetary Board will be part-time members and because the problems facing central bankers are frequently complex and technical, it is to be expected that the full-time Governor will ordinarily be the most influential member of the Board and will tend to dominate it. Accordingly, the Governor should be a man of recognized and outstanding competence in and understanding of the economic and financial problems of Ceylon, and of unquestioned integrity and responsibility”.

We would all agree that the Central Banking environment has grown more complex than at the time the MLA came into being. It is our view therefore to emphasize on the importance of the appointment and the independence which would enable him to function in his principle role – to maintain stability of the currency and not involve him in the Government activities related to economic policy or otherwise.

 Over to you Mr. Prime Minister.

Mano Alles

Retired Banker

One Response to “Governor of the Central Bank – Why the Crisis?”

  1. Dilrook Says:

    Appointing the senior most person in line is the best way to ensure this happens. Outsiders parachuted into the top position by politicians will always try to please those who appointed him out of fear, favour and gratitude. I expect the worsening of the national economy and increased political interference with the economy.

    Another very bad (political) decision.

    I pity the highly experienced and seasoned officers of the Central Bank who know what they are doing. They will never be able to get to the top position. They have not made use of politicians to get there. It is sheer hard work. But they are always denied the top post. What a pathetic state of governance the country is burdened with!

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