{"id":104795,"date":"2020-07-23T16:11:48","date_gmt":"2020-07-23T23:11:48","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=104795"},"modified":"2020-07-23T16:11:48","modified_gmt":"2020-07-23T23:11:48","slug":"the-central-bank-holds-our-president-gotabhaya-responsible","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2020\/07\/23\/the-central-bank-holds-our-president-gotabhaya-responsible\/","title":{"rendered":"The Central Bank holds our President Gotabhaya responsible"},"content":{"rendered":"

By Garvin Karunaratne, former G.A. Matara<\/em><\/span><\/h2>\n\n\n

A few weeks ago our President \u2013 true to his military form, dared\nto haul the Central Bank over the coals. The Mandarins in the Central Bank have\nnow hit back: Sri Lanka\u2019s Central Bank had complied with government directions\nas permitted by available monetary law\u201d, Central Bank officials said, in the\nwake of a controversy caused by President Gotabaya Rajapaksa slamming the\nCentral Bank after summoning the Governor to his office. Sri Lanka\u2019s Central\nBank was ordered to engage in a series of \u2018quasi-fiscal\u2019 activities which\nshould have been performed by the Treasury by printing large volumes of money,\non top of direct finance of the budget which had led to currency pressure and\ndifficulties in servicing foreign debt.\u201d( Economy Next: 10\/07\/2020)<\/p>\n\n\n\n

In other words , it means : No sir, it not us sir, it is you that\nis responsible, we have done what we can do . It is the Treasury blokes and\nmind you, you are printing a lot of money.\u201d<\/p>\n\n\n\n

I have happened to be an administrator for long both in the Sri\nLanka Administrative Service where as Senior Assistant Commissioner of Agrarian\nService. I managed a very large department with over 4000 employees as well as\noverseas-in Bangladesh where I was suddenly elevated and given command to an\nentire Department of Youth Development- the command from the Minister for\nLabour and Manpower, Air vice Marshal Aminul Islam, Design and implement a\nself employment programme as you said you could do what the ILO miserably\nfailed and show results\u201d. Perhaps my opinion may be worth considering because I\nsucceeded in designing and establishing a self employment programme and trained\nthe staff to continue it within nineteen months. Today that programme is the\npremier programme of self employment the world has known with three million\nyouths guided to become self employed so far. It is a programme that is kicking\nand alive, with youth officers becoming more economists searching and guiding\nyouths to become self employed.  It is a\nprogramme that has left its imprint on the sands of time. Though not in Finance\nthe work involved hard thinking.<\/p>\n\n\n\n

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

While the Presidents outburst came only two weeks ago, my\ncriticism of Central Bank functions goes back to 2001, when I first realized\nthat our Central Bank covers only the domestic Rupee. The question then emerges\nas to which organization is there to cover the foreign exchange that comes in.\nMy opinion of the Central Bank functions are contained in three Papers I wrote:\nDevaluation: Who Benefits? ( The Island: 4\/7\/2000), The Devaluation of the\nSri Lankan Rupee\u201d(The Island;27\/2\/2001) and The Freefloat of the Rupee: What\nhas to be done\u201d(The Island:29\/03\/2001) appearing in my book: How the IMF\nRuined Sri Lanka & Alternative Programmes of Success: Godages:2006,\npages 83-112.<\/p>\n\n\n\n

In any country there has to be an apex body that controls finance.\nThe Finance of a country comprises the foreign exchange that comes in- the\nhardcurrency, printed by the UK, USA, EU & a few other countries and the\nlocal rupee, printed by Sri Lanka for use within Sri Lanka. My opinion is that\nhandling the foreign exchange that comes in is crucial to any economy and our\nCentral Bank is entirely to blame for abdicating the right for a country to\nhandle the foreign exchange that legitimately comes into the country.<\/p>\n\n\n\n

Our Central Bank effectively controlled the foreign exchange that\ncame in till the end of 1977. . It so happened that in 1970 I and my wife came\nback from the UK- we were there for studies on a scholarship and we applied to\nthe Central Bank for permission to import a car. My wife had worked in the UK\nduring our stay and I too had some earnings from giving talks on the Sinhala\nProgramme of the BBC. We submitted details including all receipts  and the Controller of Exchange of the Central\nBank toothcombed each receipt before approving the import of a car for pounds\n875. The money had been earned by us and was banked in Lloyds Bank London, our\nbankers. That was in 1970. In short then the Central Bank effectively\ncontrolled the foreign exchange.<\/p>\n\n\n\n

In contrast now the Central Bank has come up with the ludicrous\nidea that the Central Bank only controls the local Rupee. The abdication of\nhandling our foreign exchange by following the Structural Adjustment Programme\nof the IMF from the end of 1977 is hailed by the Central Bank as a great\nsuccess. In their words, 1977 was a clear watershed  in the economic history of Sri Lanka, when\nthe country turned away from a predominantly inward looking , tightly controlled\nand welfare oriented strategy to one which primarily emphasized  export growth, competition and higher  capital investment for economic growth and\nemployment generation. The rapid spurt of the economy in 1978 was the  immediate response of a hitherto long\nstagnant economy to the relaxation of controls and the restoration of price\nincentives. The economy in its performance \nin 1978 has clearly shown  that\ngiven an appropriate policy climate it has the potential of moving onto a path\nof sustained  economic\ndevelopment.\u201d(Central Bank Annual Report 1985) .<\/p>\n\n\n\n

What actually happened was totally the opposite. This has led  to total disaster in terms of foreign debt,\ncurrency devaluation, high inflation, increased imports, poverty and\nunemployment. Following this neoliberal policy of relaxing foreign exchange use\nand meeting the shortfall with proceeds of privatization and loans has led to a\nsituation of increased foreign debt-  By\n1996 the foreign debt was  $ 4.6 billion\nand by 2008 it was at $ 17.7 billion. In 1977 our foreign debt was only $ 750\nmillion. Devaluation was from Rs 15.5 in 1977 to s 31.6 in 1978- a  devaluation of over 100% in the first year\nand to Rs 235 to the pound today!<\/p>\n\n\n\n

Matters on foreign exchange that comes in did come to a head on 25\nth January 2001, when our two State banks had to pay a massive oil bill and\nboth banks did not have enough foreign exchange and they had to go hat in hand\nto the foreign banks that had collected foreign exchange. The foreign bank that\nheld foreign currency increased their price to Rs. 100.00, when at that time\nthe dollar was trading at Rs.85.00. In the process the Rupee shrank to even Rs\n106 to the dollar. Our State banks had no other alternative than to buy at the\nhigher price demanded by the foreign bank. It is the banks that fix the\nexchange rate. Mind you it is not the bank\u2019s money. It was foreign money\ncollected by the Banks and the foreign banks had been grabbing foreign money\nfor long. Once in about 1998 I had ordered the Bank of Scotland, my bankers to\nsend money to my NRFC at the Bank of Ceylon and strangely the money was\ncredited to my NRFC in Rupees. I was going to Myanmar on a holiday and needed\nto take dollars with me but the Standard Chartered Bank to which the Bank of\nScotland had first sent the dollars snatched the dollars and credited the equivalent\nof Rupees into my account. Mr Athauda the Manager of the Bank of Ceylon said\nthat that was how most remittances come. I had to wage a battle for two full\ndays to get the money in dollars. Unknown to our Central Bank the foreign banks\nhoard foreign currency and bid the price upwards. They want the profit. Even\nour hard earned foreign exchange is manipulated by the foreign banks to make\nprofits!.<\/p>\n\n\n\n

 As an explanation, the\nCentral Bank said;\u201d in a free floating regime, the market forces determine the\nexchange rate. The CB does not intervene in the process; the CB has control\nover the domestic money supply (The Island: 17\/02\/2001). The remedy proposed by\nthe Central Bank was: in order to avoid a repeat of the catastrophe of the\nRupee sliding down, we have decided that some of the very large bills will be\nsettled outside the market and there will be forward hedging by the Banks to\neven out the payment of the bills overtime (The Island: 17\/02\/2001) Forward\nhedging is like obtaining an overdraft. This statement of the Central Bank in\nitself is indirect proof  that the\nCentral Bank should actually be controlling our foreign exchange.  The Central Bank is the apex body that has to\ncontrol the foreign exchange. <\/p>\n\n\n\n

In 2001 I wrote: foreign money that comes into our country from\nwhatever source is the property of the Sri Lankan Government, other than in\ncase of NRFC Accounts. It is this practice of allowing the banks to handle the\ncountry\u2019s legitimate earnings as their private property that enabled the banks\nto hold the Government to ransom and cause the devaluation in this\ninstance\u201dThough I wrote that this is a matter that has to be addressed to\nimmediately, nothing has happened till today. The foreign banks accept foreign\nmoney and bid the price upwards whenever they get the chance. I have been\npointing out in my Papers that our Government has to control the foreign\nexchange that comes in. This is a fundamental requirement in any country. We\nhave banks collecting foreign exchange and also private authorized money changers\naccepting foreign money. Private authorized Money Changers collect easily ten\ntimes more foreign exchange than all our banks put together.  All that money has to be credited to the\nCentral Bank and it is the Central Bank that has to disburse that money. If our\npresent mandarins in the Central Bank disagree, then to my mind they are not\nacting as a Central Bank. If it is only to handle the domestic Rupee we do not\nneed a Central Bank with specialists. A senior administrator from the SLAS  can easily attend to this task with a dozen\naccountants and clerical officers.<\/p>\n\n\n\n

I think it is immediately necessary that our Prime Minister and\nPresident should look into this problem and if the Central Bank yet persists\nthat it is not their job then appoint another authority to ensure that every\ndollar that comes in from all sources get into our coffers and get disposed as\nper decisions of the Government.<\/p>\n\n\n\n

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

The necessity of some authority to study carefully what is\nhappening to our foreign exchange is absolutely necessary because currently we\nhave had to impose draconian import controls as we do not have sufficient\ndollars. We cry out aloud but do not look into what is happening. This is very\nstrange. Let us address the following points:<\/p>\n\n\n\n

What happens to the foreign exchange that is collected at the\nbanks-private and State. Do these get credited to our Treasury. This collection\ndoes not get collected to our Treasury which is how that foreign bank had\nhoarded the foreign exchange it had collected and finally bid its price upwards\ngaining a massive profit on 25\/ 01\/2001, as stated earlier. <\/p>\n\n\n\n

What happens to the foreign exchange that is accepted by money\nchangers. Mind you I am certain that the authorized money changers collect far\nmore-around ten times more  than what all\nbanks collect. Are thee amounts credited to the Treasury? Why are we running in\ncircles finding loans from abroad and getting more and more into foreign\ndebt  while allowing this foreign\nexchange that legitimately comes into Sri Lanka to be fritted away by the\nprivate dealers. <\/p>\n\n\n\n

Further, the banks today make small payments of foreign exchange.\nEven local credit cards can be used abroad and the payments get paid from our\nreserves.<\/p>\n\n\n\n

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

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

These are all critically important \nmatters that have to be looked into. <\/p>\n\n\n\n

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

It may also be prudent to make an order that all foreigners\nstaying at hotels should pay in hard currency and that this hard currency\nshould be deposited in a State bank by the hotelier. My foreign travel was some\ntwo years ago and then it was always payment to hotels in hard currency and\nnever in the local currency.  Hard\ncurrency collected by all banks and money changers should be collected by the\nState Treasury. As it happens today it is an absurd situation to allow the hard\ncurrency that comes in  to be allowed to\ndissipate and for the Government to seek foreign loans to meet expenses that\nrequire hard currency. It is very sad that we have a Central Bank that lives in\nslumber. <\/p>\n\n\n\n

I hope these facts get to the notice of our leaders.<\/p>\n\n\n\n

Garvin Karunaratne, Ph.D. Michigan State University, 23\/07\/2020<\/p>\n\n\n\n

Author of How he IMF Ruined Sri Lanka and Alternative Programmes of Success,\n(Godages:2006)<\/p>\n\n\n\n

How\nthe IMF Sabotaged Third World Development(Kindle\/Godsages:2017)<\/p>\n","protected":false},"excerpt":{"rendered":"

By Garvin Karunaratne, former G.A. Matara A few weeks ago our President \u2013 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\u2019s Central Bank had complied with government directions as permitted by available monetary law\u201d, Central Bank officials […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[57],"tags":[],"class_list":["post-104795","post","type-post","status-publish","format-standard","hentry","category-by-garvin-karunaratne"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/104795","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=104795"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/104795\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=104795"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=104795"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=104795"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}