The Central Bank holds our President Gotabhaya responsible
Posted on July 23rd, 2020

By Garvin Karunaratne, former G.A. Matara

A few weeks ago our President – true to his military form, dared to haul the Central Bank over the coals. The Mandarins in the Central Bank have now hit back: Sri Lanka’s Central Bank had complied with government directions as permitted by available monetary law”, Central Bank officials said, in the wake of a controversy caused by President Gotabaya Rajapaksa slamming the Central Bank after summoning the Governor to his office. Sri Lanka’s Central Bank was ordered to engage in a series of ‘quasi-fiscal’ activities which should have been performed by the Treasury by printing large volumes of money, on top of direct finance of the budget which had led to currency pressure and difficulties in servicing foreign debt.”( Economy Next: 10/07/2020)

In other words , it means : No sir, it not us sir, it is you that is responsible, we have done what we can do . It is the Treasury blokes and mind you, you are printing a lot of money.”

I have happened to be an administrator for long both in the Sri Lanka Administrative Service where as Senior Assistant Commissioner of Agrarian Service. I managed a very large department with over 4000 employees as well as overseas-in Bangladesh where I was suddenly elevated and given command to an entire Department of Youth Development- the command from the Minister for Labour and Manpower, Air vice Marshal Aminul Islam, Design and implement a self employment programme as you said you could do what the ILO miserably failed and show results”. Perhaps my opinion may be worth considering because I succeeded in designing and establishing a self employment programme and trained the staff to continue it within nineteen months. Today that programme is the premier programme of self employment the world has known with three million youths guided to become self employed so far. It is a programme that is kicking and alive, with youth officers becoming more economists searching and guiding youths to become self employed.  It is a programme that has left its imprint on the sands of time. Though not in Finance the work involved hard thinking.

About the integrity of the Central Bank, perhaps, the cat is out of the bag when a Central Bank mandarin has admitted : ETI has paid bribes amounting to Rs. 113.8 million to high ranking officials at regulatory agencies and several other high profile individuals, a CBSL official revealed. (CeylonToday: 17/7/2020)

While the Presidents outburst came only two weeks ago, my criticism of Central Bank functions goes back to 2001, when I first realized that our Central Bank covers only the domestic Rupee. The question then emerges as to which organization is there to cover the foreign exchange that comes in. My opinion of the Central Bank functions are contained in three Papers I wrote: Devaluation: Who Benefits? ( The Island: 4/7/2000), The Devaluation of the Sri Lankan Rupee”(The Island;27/2/2001) and The Freefloat of the Rupee: What has to be done”(The Island:29/03/2001) appearing in my book: How the IMF Ruined Sri Lanka & Alternative Programmes of Success: Godages:2006, pages 83-112.

In any country there has to be an apex body that controls finance. The Finance of a country comprises the foreign exchange that comes in- the hardcurrency, printed by the UK, USA, EU & a few other countries and the local rupee, printed by Sri Lanka for use within Sri Lanka. My opinion is that handling the foreign exchange that comes in is crucial to any economy and our Central Bank is entirely to blame for abdicating the right for a country to handle the foreign exchange that legitimately comes into the country.

Our Central Bank effectively controlled the foreign exchange that came in till the end of 1977. . It so happened that in 1970 I and my wife came back from the UK- we were there for studies on a scholarship and we applied to the Central Bank for permission to import a car. My wife had worked in the UK during our stay and I too had some earnings from giving talks on the Sinhala Programme of the BBC. We submitted details including all receipts  and the Controller of Exchange of the Central Bank toothcombed each receipt before approving the import of a car for pounds 875. The money had been earned by us and was banked in Lloyds Bank London, our bankers. That was in 1970. In short then the Central Bank effectively controlled the foreign exchange.

In contrast now the Central Bank has come up with the ludicrous idea that the Central Bank only controls the local Rupee. The abdication of handling our foreign exchange by following the Structural Adjustment Programme of the IMF from the end of 1977 is hailed by the Central Bank as a great success. In their words, 1977 was a clear watershed  in the economic history of Sri Lanka, when the country turned away from a predominantly inward looking , tightly controlled and welfare oriented strategy to one which primarily emphasized  export growth, competition and higher  capital investment for economic growth and employment generation. The rapid spurt of the economy in 1978 was the  immediate response of a hitherto long stagnant economy to the relaxation of controls and the restoration of price incentives. The economy in its performance  in 1978 has clearly shown  that given an appropriate policy climate it has the potential of moving onto a path of sustained  economic development.”(Central Bank Annual Report 1985) .

What actually happened was totally the opposite. This has led  to total disaster in terms of foreign debt, currency devaluation, high inflation, increased imports, poverty and unemployment. Following this neoliberal policy of relaxing foreign exchange use and meeting the shortfall with proceeds of privatization and loans has led to a situation of increased foreign debt-  By 1996 the foreign debt was  $ 4.6 billion and by 2008 it was at $ 17.7 billion. In 1977 our foreign debt was only $ 750 million. Devaluation was from Rs 15.5 in 1977 to s 31.6 in 1978- a  devaluation of over 100% in the first year and to Rs 235 to the pound today!

Matters on foreign exchange that comes in did come to a head on 25 th January 2001, when our two State banks had to pay a massive oil bill and both banks did not have enough foreign exchange and they had to go hat in hand to the foreign banks that had collected foreign exchange. The foreign bank that held foreign currency increased their price to Rs. 100.00, when at that time the dollar was trading at Rs.85.00. In the process the Rupee shrank to even Rs 106 to the dollar. Our State banks had no other alternative than to buy at the higher price demanded by the foreign bank. It is the banks that fix the exchange rate. Mind you it is not the bank’s money. It was foreign money collected by the Banks and the foreign banks had been grabbing foreign money for long. Once in about 1998 I had ordered the Bank of Scotland, my bankers to send money to my NRFC at the Bank of Ceylon and strangely the money was credited to my NRFC in Rupees. I was going to Myanmar on a holiday and needed to take dollars with me but the Standard Chartered Bank to which the Bank of Scotland had first sent the dollars snatched the dollars and credited the equivalent of Rupees into my account. Mr Athauda the Manager of the Bank of Ceylon said that that was how most remittances come. I had to wage a battle for two full days to get the money in dollars. Unknown to our Central Bank the foreign banks hoard foreign currency and bid the price upwards. They want the profit. Even our hard earned foreign exchange is manipulated by the foreign banks to make profits!.

 As an explanation, the Central Bank said;” in a free floating regime, the market forces determine the exchange rate. The CB does not intervene in the process; the CB has control over the domestic money supply (The Island: 17/02/2001). The remedy proposed by the Central Bank was: in order to avoid a repeat of the catastrophe of the Rupee sliding down, we have decided that some of the very large bills will be settled outside the market and there will be forward hedging by the Banks to even out the payment of the bills overtime (The Island: 17/02/2001) Forward hedging is like obtaining an overdraft. This statement of the Central Bank in itself is indirect proof  that the Central Bank should actually be controlling our foreign exchange.  The Central Bank is the apex body that has to control the foreign exchange.

In 2001 I wrote: foreign money that comes into our country from whatever source is the property of the Sri Lankan Government, other than in case of NRFC Accounts. It is this practice of allowing the banks to handle the country’s legitimate earnings as their private property that enabled the banks to hold the Government to ransom and cause the devaluation in this instance”Though I wrote that this is a matter that has to be addressed to immediately, nothing has happened till today. The foreign banks accept foreign money and bid the price upwards whenever they get the chance. I have been pointing out in my Papers that our Government has to control the foreign exchange that comes in. This is a fundamental requirement in any country. We have banks collecting foreign exchange and also private authorized money changers accepting foreign money. Private authorized Money Changers collect easily ten times more foreign exchange than all our banks put together.  All that money has to be credited to the Central Bank and it is the Central Bank that has to disburse that money. If our present mandarins in the Central Bank disagree, then to my mind they are not acting as a Central Bank. If it is only to handle the domestic Rupee we do not need a Central Bank with specialists. A senior administrator from the SLAS  can easily attend to this task with a dozen accountants and clerical officers.

I think it is immediately necessary that our Prime Minister and President should look into this problem and if the Central Bank yet persists that it is not their job then appoint another authority to ensure that every dollar that comes in from all sources get into our coffers and get disposed as per decisions of the Government.

In 1977 the IMF allowed us loans if we adhered to the Structural Adjustment Programme and that was why  we had to liberalize the use of foreign exchange, allow dollars for foreign travel, for overseas studies, foreign holidays etc and also relax foreign imports. In case we did not have sufficient dollars to do this spending spree then the IMF recommendation was for  us to sell off privatize government entities and feed the funds collected to enable this expenditure. If that was not sufficient then we were asked to obtain loans. The IMF itself gave us loans with grace periods so that the  leaders who accepted the loan will be out of office when it comes to repayment. It is by going on this path that our Rupee had lost its value from Rs 15.50 in November 1977 to Rs 235.00 today. It was this process, instead of controlling foreign exchange disbursement by import controls etc. that led us to create a massive foreign exchange debt.

The necessity of some authority to study carefully what is happening to our foreign exchange is absolutely necessary because currently we have had to impose draconian import controls as we do not have sufficient dollars. We cry out aloud but do not look into what is happening. This is very strange. Let us address the following points:

What happens to the foreign exchange that is collected at the banks-private and State. Do these get credited to our Treasury. This collection does not get collected to our Treasury which is how that foreign bank had hoarded the foreign exchange it had collected and finally bid its price upwards gaining a massive profit on 25/ 01/2001, as stated earlier.

What happens to the foreign exchange that is accepted by money changers. Mind you I am certain that the authorized money changers collect far more-around ten times more  than what all banks collect. Are thee amounts credited to the Treasury? Why are we running in circles finding loans from abroad and getting more and more into foreign debt  while allowing this foreign exchange that legitimately comes into Sri Lanka to be fritted away by the private dealers.

Further, the banks today make small payments of foreign exchange. Even local credit cards can be used abroad and the payments get paid from our reserves.

There is a further development re hotel bookings made by internet booking agencies. These are all foreign multinationals who do publicity, fix hotel rates (all of which should be done by a local tourist authority), then the payment is made to the hotel in local Rupees, but the internet booking multinational sends to the hotelier an invoice for 15% of the amount paid which gets paid in foreign currency ie. from our reserves. In other words hotel bookings made by internet booking agencies eats into our foreign exchange. With internet bookings being the major sales mode today , tourism actually eats into our foreign reserves.  Our economic sleuths fail to even understand  how our foreign reserves are being depleted through tourism. Tourism as happening today only creates employment in hotels and sales outlets.

It is also important to note that through FDI(Foreign Direct Investment) many investors bring in a small amount at the initial stage but get involved in local sales in the Rupee, importing sales goods through our dollar reserves and thereafter  repatriate profits in dollars from our reserves.  Recently our Government has decided to not allow the repatriation of profits. However the manner in which foreign multinationals continue to trade in rupees today perhaps indicate that they are somehow entitled to take away profits in dollars. To add to this is Uber Eats, Pickme and such institutes who also trade in rupees. All of them  take away profits from our reserves. Our country is the net loser. Though our Central Bank mandarins have decided that this is not their domain I beg to disagree and I am dead certain that the Central Banks of other countries do handle their  foreign exchange collections.  Actually their main task is to guard the foreign exchange.

These are all critically important  matters that have to be looked into.

We have to guard our foreign exchange, otherwise as a sovereign country we are dead. An immediate decision has to be made that incase of all internet hotel bookings the payment is required in hard currency that has to get deposited at a State bank and it is out of this deposit that the 15% has to be paid to the internet booking multinational.

It may also be prudent to make an order that all foreigners staying at hotels should pay in hard currency and that this hard currency should be deposited in a State bank by the hotelier. My foreign travel was some two years ago and then it was always payment to hotels in hard currency and never in the local currency.  Hard currency collected by all banks and money changers should be collected by the State Treasury. As it happens today it is an absurd situation to allow the hard currency that comes in  to be allowed to dissipate and for the Government to seek foreign loans to meet expenses that require hard currency. It is very sad that we have a Central Bank that lives in slumber.

I hope these facts get to the notice of our leaders.

Garvin Karunaratne, Ph.D. Michigan State University, 23/07/2020

Author of How he IMF Ruined Sri Lanka and Alternative Programmes of Success, (Godages:2006)

How the IMF Sabotaged Third World Development(Kindle/Godsages:2017)

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