The Central Bank has failed the Nation.
Posted on July 5th, 2024

Sugath Kulatunga

 I agree totally with my Senior colleague at Arunachalam Hall who on 24 February pointed out on the LBN the dangers of unbridled power enjoyed and abused by the Central Bank (CBSL). They relished this privilege even before the recent IMF inspired independence. It was the mandarins of the CBSL who controlled both the monetary policy and the fiscal policy of the country by hogging the top positions of both the Monetary Board and the Ministry of Finance. It is this unholy alliance that resorted to profligate borrowing, which stifled development and bankrupted the country.

At present the Central Bank has been provided with an ‘autonomy’ by the new Central Bank Act which says that the:

1) The Central Bank shall have administrative and financial autonomy.

(2) The Central Bank shall be autonomous and accountable.

The Act fails to specify the ‘accountability ‘ requirement leaving the CBSL to interpret it to their advantage like on policy on salaries.

CBSL has nearly 1000 professionals under one roof. Even before the present pay hike they enjoyed the best of salaries in the public service. The CBSL raised the salaries of its staff by between 29.53% (most junior office assistants) and  76.97% for its highest grade of Deputy Governor. With the revision an office assistant (KKS) gets a monthly salary of 198,000 while a Deputy Governor collects a cool Rs 1.7 million. This lavish pay hike will result in  CBSL’s monthly salary bill rise by 50 percent. This is done while making substantial losses. CBSL staff are entitled to foreign training, mostly leading to a PhD. Their posts are pensionable and are also covered with a provident fund where the CBSL contribution is a high 29 %. On top of all these they wallow in other perks like loans at interest rates as low as 1%. The public wishes to know whether the contribution of the CBSL to the nation is commensurate with these superlative rewards.

The recent history of this expensive so-called professional body has not been above board and blameless. Public is aware of the Greek Bond scandal and the the outragous Arjuna Mahendran bond scam. The issue of 12 billion dollars of ISBs at high rates of interest during the Yahapalana regime cannot be swept under the carpet.It has now become the bone of contention.

State Minister of Finance tried to exculpate the CBSL on the astronomical pay hike, stating that the move targeted positions facing scarcity of replacements, to retain qualified personnel and insisted the necessity of competitive salaries to prevent talent drain from the Central Bank.

CBSL is staffed by economists specializing in banking, accounts, statistics etc. There is a surfeit of economists employed in the universities, as school teachers and in the  public service and the private sector who would be happy to join the CBSL with the superlative salaries and perks. It is also a myth that a PhD is essential to serve in the CBSL. Mr.A.S. Jayawardhana who served the Bank with distinction as a Deputy Governor and Governor did not have a doctorate. He is credited with the successful restoration of the CBSL to normalcy after the disastrous LTTE bomb attack.

The departments of the Bank are grouped into four key business clusters, namely – Economic & Price Stability Cluster, Financial System Stability Cluster, Agency Functions & Corporate Services Cluster and Legal & Enforcement Cluster. A department is headed by a Director (or equivalent). By 2014 there were 27 Departments. Among the responsibilities of these  Departments is the orderly and smooth functioning of the domestic foreign exchange market. This consist of activities such as;

*Continuous monitoring of the foreign exchange operations of licensed commercial banks and National Savings Bank and Authorized Money Brokers Bank Supervision is a major function for which there is a separate department which is responsible for -the regulation and supervision of licensed banks by;

  Licensing of commercial banks and specialized banks in Sri Lanka and

  Conducting continuous supervision of licensed banks and

  Formulating and issuing prudential regulations to licensed banks.

  Reviewing and amending the relevant Acts and regulations in line with current market developments, international standards and best practices.

On bank supervision the Foreign Exchange Act of 2017 provides the responsibility of the commercial banks to make prompt reports on foreign exchange transactions.At Article 80. (1) Every commercial bank shall, as soon as may be after the close of business at the end of such period as may be prescribed by the Monetary Board, make a report to the Central Bank setting out the volume and composition of its purchases and sales of foreign exchange during that period, and shall furnish such additional information as the Central Bank may require with reference to such purchases and sales and to the movements of its accounts in foreign currency.

Regulations have been made under Section 29 read with Section 7 of the Foreign Exchange Act, No. 12 of 2017 specifying requirements related to Repatriation of Export Proceeds to Sri Lanka by Exporters of Goods.( Gazette 2145/49 – THURSDAY, OCTOBER 17, 2019) where every exporter of goods is required to repatriate to Sri Lanka payments received for the exportation of goods within 180 days from the date of exportation.

1.      Every exporter of goods shall repatriate to Sri Lanka payments received for the exportation of goods within 180 days from the date of exportation.

2.      Every exporter of goods shall submit related documentary evidence on each exportation to the respective authorized dealer or restricted dealer that receives the payment.

3.      Central Bank shall have the right to introduce an appropriate mechanism to monitor compliance of exporters of goods with this requirement and also to institute actions against any non-compliance with the aforesaid requirements of this Heading.

Subsequently the Monetary Board issued Rules published in the Gazette Extraordinary No. 2215/39 dated 18.02.2021 on repatriation of export proceeds.These rules stipulate that:

1. Every exporter of goods shall:
(i) receive the export proceeds in Sri Lanka in respect of all goods exported within hundred and eighty (180) days from the date of shipment, and
(ii) forthwith submit all related documentary evidence on each and every receipt of export proceeds in respect of every export of goods made, to the respective Licensed Commercial Bank or the Licensed Specialized Bank (hereinafter referred to as Licensed bank”) that receives such proceeds in Sri Lanka.

2. Every exporter of goods shall, immediately upon the receipt of such export proceeds into Sri Lanka as required under this Rule, convert twenty five per centum (25%) from and out of the total of the said exports proceeds received in Sri Lanka into Sri Lanka Rupees, through a licensed bank.

3. The requirement of converting the aforesaid twenty five per centum (25%) from and out of the export proceeds received in Sri Lanka, shall continue, until any other percentage as may be determined by the Monetary Board, from time to time.

4. All licensed banks shall be required to mandatorily monitor, strictly, the receipts of exports proceeds in Sri Lanka within the period as stipulated and the conversion of such proceeds as required in this Rule, and shall maintain all documentary evidence relating or in connection thereto.

5. All licensed banks shall submit reports to the Director of the Foreign Exchange Department of the Central Bank of Sri Lanka as may be required from time to time and provide unencumbered access to the officers of the Central Bank of Sri Lanka as may be authorized by the Governor or the Deputy Governor, as the case may be, to inspect or examine the records maintained under the Rule, and to examine and review all actions taken by such licensed banks in securing full and strict compliance with these Rules.

6. This Rule shall apply in respect of all goods exported and where the hundred and eightieth (180th) date from the date of the shipment and exports proceeds received to Sri Lanka on any date after 18 February 2021.

The Central Bank has failed miserably to supevise the commercial banks and  implement these regulations. The dereliction of this primary duty has been disastrous and led to the bankruptcy of the country. It is a 50 billion dollar felony.

In an interview with the Aruna News Paper in December 2022, Dr. Wijeyadasa Rajapakshe, Minister of Justice has said inter alia that අපනයන ව්‍යාපාරිකයෝ බොහෝ ගණනක් මේ රටේ සල්ලි ඉතාමත් භයානක ලෙස පිටරට රඳවාගෙන එහෙ ව්‍යාපාර කරනවා කියලා. අපේ මිනිස්සු දුක්විඳලා ලේ දහඩිය හෙළලා හම්බකරගත්ත දේපළ පිටරට යවලා පවුල් කීපයක් දෙතුන්දෙනෙක්ගේ සුඛ විහරණය වෙනුවෙන් ඒ සල්ලි එහෙ පාර්ක් කරගෙන ඉන්නවා.සංඛ්‍යා ලේඛන ඇතුව ඉදිරිපත් කළේ ඩොලර් මිලියන පනස්තුනකට වැඩි ප්‍රමාණයක් වංචනිකව රඳවා තබා ගැනීම නිසා තමයි අපේ රටේ විදේශ විනිමය අර්බුදය ආවේ. මුළු විදේශ ණය ගත්තත් ඩොලර් බිලියන පනස්දෙකයිනෙ තියෙන්නෙ. ඊට වැඩි මුදලක් මේ අවුරුදු දොළහෙ රඳවා ගෙන තියෙනවා ඒ අය. මේ අපිට සොයාගත හැකි මුදල පමණයි. නමුත් මගේ තක්සේරුව ඊට වැඩිය දෙගුණයක්. අපේ රටේ අපනයන නීති ඉතාමත් ලිහිල් කර තිබුණා. ඒ වගේම කියන්න ඕන මහ බැංකුව කියන එක අර පිටකොටුවෙ දුම්කොළ කඩයක් තරමටවත් පාලනයක් තිබුණ තැනක් නෙමෙයි.

This scam was the focus of the debate in Parliament on 23.8.23 where Dr. Wijeyadasa Rajapakshe, Minister of Justice repeated that according to a Global Integrity Report d during the last 22 years export proceed that should have been repatriated back to the country but not sent back was USD 53.5 billion. The Central Bank and the Ministry of Finance have been evasive on why no action is being taken to ensure that this vast sum which is more than the total amount of our foreign debt of 37 billion USD. The State Minister of Finance merely stated that the Central Bank Governor has given an assurance that the funds that should be brought back to Sri Lanka will be brought back. He added that the government can look into later what happened in the past but what is important now is to stabilize the economy.

The real reason why it will not happen is with the covenant the government has agreed with the IMF. These conditions are in the Attachment I. to the Letter of Intent dated March 6,2023 signed by both President Wickremesinghe and the Governor of the Central Bank Nandalal Weerasinghe in the Memorandum of Economic and Financial Policies. AT Page 98 of the IMF Staff Report 23/116, it is stipulated in Article 21:

21. We will phase out the administrative measures imposed to support the balance of payments, including those introduced on an emergency basis, once conditions allow. These measures include import restrictions, exchange restrictions, multiple currency practices (MCPs), and capital flow management (CFM) measures. (ref footnote 36)

While the mentioned import restrictions, exchange restrictions, MCPs and CFMs could help mitigate FX shortages in the near term, we believe they should not be a substitute for the comprehensive policy package and ongoing macroeconomic adjustment. We are committed to phasing these measures out as the balance of payments stabilizes. To this end, by June 2023, we will prepare a plan for the phased removal of these measures during the program period as we make progress with achieving macroeconomic stability, particularly with respect to the exchange rate, debt sustainability, and financial stability, improved market access.

Reference foot note 36 the main CFM measures introduced or tightened in 2020-2022 and currently in force include:

 (i) a repatriation requirement for exports of goods and services; (ii) a surrender requirement for exporters on proceeds from exports of goods;

(iii) a surrender requirement for banks on purchases of export proceeds;

(iv) a surrender requirement for banks on purchases of inward worker remittances;

(v) suspension of outward remittances on capital transactions;

(vi) restrictions on purchases of Sri Lankan ISBs by local bank”.

The restriction on repatriation was self imposed by the government by the **Letter of Intent dated March 6,2023. There is no explanation why the regulations were not imposed earlier. The only explanation is that exporters, Commercial Banks and the CBSL are complicit in this swindle. It is too big to have escaped the clutches of politicians.

**(The letter of intent should have been signed by the President and the Prime Minister who is the head of the Parliament which has plenary power over finance. Governor Central Bank is only a functionary.)

The tragedy is that opposition parties have not shown any concern on this scam and the NGOs which rush to the Supreme Court with fundamental rights of individuals do not seem to be interested in a fundamental right of the nation. The 50 billion dollar figure is the historical loss to the nation. It is estimated that around 4 billion dollars is the annual loss. The IMF facility is only 3.9 billion dollars. The total foreign debt of the country is 37 Billion dollars.

The legislation on the establishment of the CBSL envisaged that in addtion to its routine functions as a central bank it would contribute to the development of the country.

In CAP 422] -monetary law (8th Rev.) on the establishment and objectives of Central Bank, at chapter (ii) it is stipulated that inter alia that the-

 Central Bank is charged with the duty of securing, so far as possible by action authorised by this Act, the following objectives, namely: –

economic and price stability; and financial system stability, with a view to encouraging and promoting the development of the productive resources of Sri Lanka. It is clear that the ultimate objective is the development the productive resources of the country.

In the new CBSL Act, No. 16 of 2023 it is further confirmed at article 6 (3) on the Objects (3) Without prejudice to the attainment of its objects and subject to the provisions of this Act, the Central Bank shall support the general economic policy framework of the Government as provided for in any law.” It is in this broad context that the performance of this 1000 strong professional body has to be evaluated.

Today there is no function or department to ensure promoting the development of the productive resources of Sri Lanka” as envisaged in the Monetary Law. In 1979 the CBSL had a Development Finance Department which was headed by V.K. Wickremesinghe. At that time  the Export Promotion Secretariat had a close rapport with V.K and worked together tin the establishment of the Sri Lanka Export Credit Corporation (SLECIC).V.K had a vision on development and was familiar with the radical and rapid development in the Far East. I recollect him saying that the island of Sri Lanka should follow the developments taking place in the Chinese Republic island of Taiwan which was similar in size and population and of economic background. Of course it was an unofficial comment. Since 2005 the Development function has been placed under the Ministry of Finance.

In recent times the banking sector in the country has faced serious problems. Non perfoming loans have increased. The only solution the Banks have is to invoke Pareto Execution. Banks have no system of intervening in failing investments. Bank officials do not have the competence to detect early signs of delinquency. The problems are more acute in the micro finance sector. It is the responsibility of the Central Bank to devise preventive systems and even train the Bank staff in their implementation.

The Chairman of the Ways and Means committee of the Parliament Patali Champika Ranawaka has stated that the annual loss to the country by misinvoicing is over 4 billion US dollars. The Central Bank has not shown much interest in reducing misinvoicing which is widely prevalent and is said to be carried out with the connivance of the customs and the commercial banks.

I cannot but mention my disappointment with the Central Bank in my dealing with them in my capacity as the Director General of the Export Development Board. At the very inception the EDB had selected the Gems and Jewellery sector to be given high priority in export development. The EDB resuscitated the Blue Diamonds Ltd giving a boost to the diamond cutting industry. Heat treating machines were imported to support the value addtion to geuda stones. A gem cutting center was established to improve the gem cutting technology. There were two critical problems that the gems and jewelry industry faced at the time.

One was the severe competition that the local industrialists had from Thai nationals who had established themselves strongly in the gem mining centers and buying up the uncut gems and specially geuda. These were then exported legally and more illegally to Thailand where uncut stones were cut and geudas burned and converted to sapphires. The Thais had the financial strength to buy up massive stocks of geuda and uncut gems. The local industrialist did not have the financial strength to stock the raw material. At a meeting where the Governor of the Central Bank was present I explained this problem and proposed that the Central Bank should establish a special refinance scheme of Rs 500 million to meet this need. The Governor said that will increase the money supply in the country leading to inflation and other problems. I replied that the EDB will freeze that amount of funds which was held by the EDB in Bank deposits to prevent an increas of money supply. The Governor rejected the proposal. The outcome was that Sri Lanka lost the opportunity to become a gems and jewelry center and our gems helped Thailand to become a premier center for gems and jewelry.

The second problem with our industry was the restrictions on gold import for manufacture of jewelry. Sometime in 1985 at my request the Acting Minister of Trade Mahendra Wijeratne took up with the Cabinet the problem of securing gold for the Jewellery Industry, at which the President JR had directed the Acting Minister to undertake a study of the Gold Trade in a few East Asian countries. The Acting Minister instructed me to do this study and he wanted a report submitted to the President at the following cabinet meeting. I told him my knowledge of gold was limited to what was said about the metal, in James Bond novel GoldFinger by Ian Fleming. Acting Minister who too was a 007 fan said that was more than enough and asked me to go ahead.

The Hong Kong Chinese are reputed to be very conservative investors. They do not trust very much paper currency which have had many fluctuations in value. But gold is a solid investment, and the Chinese were willing to forgo the interest on Bank deposits, which was very small, and preferred to hold their investment in gold in the banks which were prepared to hold the gold on behalf of the investors. The investor had the right to get the gold back at any time. It was a win-win situation. It was the safest investment. Gold did not depreciate but appreciated against paper currencies. As proof of the gold deposit the investor was given a paper certificate and hence the gold in the Bank was called “Paper Gold”. The paper was also transferrable. Under this system gold was freely available in the country for the Jewellery industry.

It was also mentioned that it was encouraged by the government as paper gold mops up excess currency in the economy and reduces inflation. It was an efficient and transparent system.

I was told that the President JR liked the idea of paper gold, but the Central Bank had objected to the idea on the grounds that gold is bullion and cannot be made a subject of any other agency. In fact, the US had restrictions on the ownership of gold until 1975.

EDB had from its inception been debating with the Central Bank to make import of gold free for the jewelry industry. Other than this irrelevant statutory restriction the Central Bank had an obnoxious objection which was not openly disclosed, that India will not like it as it will encourage smuggling of gold to India. My answer was that if gold smuggling to India is done on a fair scale there would be less terrorism in the North.

It is a tragedy that the Central Bank with its 1000 professional staff has not contributed in proportion of their numbers and cost to the development of the country. It is conceded that a few individuals like Gamini Corea have excelled in the international arena. His valiant effort to introduce a New Economic Order was a failure and not even spoken about now. The collective contribution of the Central Bank for the development of the country does not match the individual contribution of economists like G.V.S. De Silva and SBD.de Silva. In their retirement Dr.Sandaratne and Dr.Wijewardhana are making a contribution than most of the staff of the present Central Bank. An organization which should have been the Think Tank of the country has turned out to be a den of lotus eaters. In recent years they have been responsible for several massive scams. It is they who borrowed on ISBs at high rates of interest which resulted in the crown achievement of the Bank to declare that Sri Lanka is bankrupt.

One has to agree with the Minister of Justice Wijedasa Rajapakse that මහ බැංකුව කියන එක අර පිටකොටුවෙ දුම්කොළ කඩයක් තරමටවත් පාලනයක් තිබුණ තැනක් නෙමෙයි.

Sugath Kulatunga

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