An Independent Central Bank:  Does it not clash with the sovereignty of the country?  
Posted on March 20th, 2023

by Garvin Karunaratne

To my mind, the  Central Bank of any country is an integral part of the  sovereign country  and it is a ridiculous statement to talk of a Central Bank being independent of its  country.  It is actually the Central Bank of a country that has to perform the most important function of monetary policy-  what monetary policy can bring about the maximum development of the country etc. Thus I fail to comprehend why  anyone should ever even think of a Central Bank being independent of its country. It is ridiculous in the extreme.   

However today  there is a Bill in Parliament to grant  independence to the Central Bank!  

The Governor of our Central Bank states,  as reported in The Daily Mirror of 17/3, it is to:  

enable to make unpopular but essential decisions in prioritizing price stability in the country…  

to empower the Central Bank to make right decisions, not popular decisions- has the ability to work independently and make decisions without any influence from fiscal authorities and such, decisions cannot be changed at the whims of the Government in power”   

It is absurd to grant any power to any body or organization  to rule over the Houses of Parliament, elected by the people. This amounts to an  infringement over the sovereignty of the people. Instead, the task of a Central Bank is to provide expert opinion on managing the economy, apprize the Government of the best course of action and warn the Government of possible consequences.  

I happen to have worked at high level in Sri Lanka handling the allocation of foreign exchange to small industrialists in 1970 as well as in several other countries and have had dealings with Central Banks. A Programme designed and implemented by me in Bangladesh- The Youth Self Employment Programme, implemented by members of the elite Bangladesh Civil Service trained by me is today the world’s largest and most successful employment creation programme the world has known, having bagged over three million youths into self employment, all achieved within four decades.  Thus I do speak with a great deal of experience and my work involved the Central banks.  

The Central Bank of any country  is there not only to guide its parliament to handle its finances but to take active steps to guard its monetary matters its foreign exchange as well as the local currency. This is a sacred task.   

When one looks at the past history of our Central Bank  it is clear that till 1977, the Central Bank played the important  role of providing advice to bolster the economy, to make the economy sound by managing our  monetary matters with the foreign exchange we earn but sadly after the end of 1977 played a dubious role to ruin the economy of Sri Lanka.  It is this sad path which the Central Bank has been playing from the end of 1977, to make the Governments of Sri Lanka fail in its handling its monetary matters- advising the Government of Sri Lanka to live on loans as dictated by the IMF , which has led Sri Lanka to build up a foreign debt to as much as $ 56 billion today.    As pointed out by me in How the IMF’s Structural Adjustment Destroyed Sri Lanka, Godages, 2022,   

Before the end of 1977,  the economy was handled very carefully by the Government Departments that handled the incoming foreign exchange, under the total gaze of the Central Bank.  Then the Central Bank actually controlled all segments of the administration in matters of finance.  

After allocations were made for food, medicines etc. small allocations were given  for the import of cars, fridges etc. In 1959 I had to wait in queue for two months to purchase a Peugeot 203.   

It was through this careful handling that we managed the economy. Even when the country had plenty of  foreign exchange and implemented the Gal Oya Development Programme where we selected Morrison Knudson, the prestigious US firm  that built the Hoover Dam and paid them in foreign currency to build the Gal Oya tank, three times the size of Parakrama Samudra and build the entire District of Ampara, we were very strict on the use of foreign exchange. This was the golden era that we can now talk of   where almost a million acres were opened up  for cultivation, tanks and irrigation structures built, employment found for thousands, agricultural marketing organized to enable producers to benefit, self sufficiency achieved in many areas like paddy production by 1970. I have played a leading role in this phase in many government departments that were run very efficiently.   

To my knowledge the Central Bank started playing a dubious role when President Jayawardena commenced  the policy of Running the country on loans as advised by the IMF and not repaying them. Then the  Central Bank of the country instead of warning him, sang hossanahs in praise of this dubious method of running a country. In the words  of the Central Bank,  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”(Annual Report of the Central Bank:1985)  

The Central Bank shrewdly avoided telling the basic fact that the foreign debt of Sri Lanka had increased to $ 4 billion by 1985. 

The Central Bank also looked away when the development infrastructure- the colonization schemes run by the District Administration, the Small Industries Department that made Sri Lanka self sufficient in all textile manufacture, the Department for Development of Agricultural Marketing which offered high prices to producers and also made Sri Lanka self sufficient in all fruit products- juice, jam etc in the three years 1955to 1958 and many more Departments were abolished or sidelined. That was the contribution of the Central Bank after 1977! 

I have  sussed up what did really happen when the economy was opened up to run with money borrowed , not utilized for economic development but instead allowed to be spent for fun and dance by the rich in my books: 

Microenterprise Development… The Way Out of the World Bank & IMF Stranglehold, Sarasavi, 1997 

How the IMf Ruined Sri Lanka & Alternative Programmes of Success, Godages, 2006,  

How the IMF Sabotaged Third World Development, Godages/Kindle,2017 

: How the IMF’s Structural Adjustment Destroyed Sri Lanka(2022):  

. Following this neoliberal economic policy of relaxing foreign exchange use and meeting the shortfall with proceeds of privatization and loans  has lead to a situation of foreign debt- by 1986 the foreign debt grew to $ 4 billion and by 2008  it was at $ 17.7 billion. In 1977 our foreign debt was only $ 750 billion and that too on projects, not on consumption. Devaluation of our Rupee  was from Rs. 15.5 to Rs 31.6, in 1978 a devaluation of over a 100% in the very first Year.”  

This sums up the work done by the Central Bank. 

The Annual Report of the Central Bank 1978, reports: 

Substantial capital inflows, together with resources from the IMF went on to create a favourable balance payment:”  

In my words, the words favourable can be concluded to be misleading in the extreme, to refer to resources(loans)from the IMF as favourable  because the IMF finances are loans on interest that increase the foreign debt of the country. Actually the loans worsened the economy.”(From How the IMF’s Structural Adjustment Destroyed Sri Lanka, Godages, 2022) 

The Central Bank had also to face some real music  on 25 th January 2001, when our two State Banks  had to pay a massive oil bill and did not have sufficient foreign dollars. The two banks went hat in hand to the private banks that had collected dollars. The foreign bank that held the foreign currency increased their price to Rs `100.00  to Rs 106.00per dollar when the dollar was trading at Rs 85.00. Our two State Banks had no alternative other than to buy the dollars at the high price resulting in an immediate devaluation of 15% happened.  In explanation the Central Bank said  that it has control only over the domestic money supply”(The Island Feb 17, 2001).  The question then emerges as to who controls the foreign exchange of  the country.  It is very very silly  to talk of a Central Bank that only controls the local currency!.  

What really did happen on 25 th Jan 2001 was  that even the foreign exchange earnings of a sovereign country is a commodity exploited to make a profit” (page 61) It is really absiurd for a Central Bank to state that it does handle only the local currency. In the pre 1977 era, the main task of the Central Bank was to handle the foreign funds that came in.  . It is correct to state that in the pre 1977 era the main  role of the Central Bank was to control the foreign exchange that came in.      

Is it to this Central Bank that has a dismal record that we are proposing independence.  This deserves hard thinking.

Garvin Karunaratne. Ph.D. Michigan State University

former SLAS


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