The Central Bank should play the role of a smart wife when dealing with the government, treating it as a husband who does things for overall welfare of the family while preserving its independence, said a retired Central Banker.
Maintaining Central Bank’s independence in a sovereign state is one of the most challenging tasks as it often ends up being a cat’s paw of governments in certain developing nations and become subject to criticism by the politicians when it does not do things that pleases them and help them to appease the electorate.
According to Dr. W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka and a renowned commentator of economic affairs said the political leaders are difficult customers and the Central Bank management would find it difficult to put the rationale of their policies across to them effectively.
“The solution suggested by the first Sri Lankan Governor of the Central Bank, the late N.U. Jayawardena was that the Bank should keep on nagging the government until it begins to realize and appreciate the bank’s position,” he said.
At the time Jayawardena had suggested the relationship between the government and the Central Bank should be that of a husband and a wife. This is because a good wife will nag the husband to do only good, who also does things for the overall welfare of the family.
However Dr. Wijewardena seems to believe that in the Sri Lankan context a good wife is too good for the government as she can get pregnant all the time whenever she walks up to her husband who is full of vices. “However, in my view, the wife should be a smart wife and not merely a good wife.
That is because a good wife, having accommodated the demands of the husband may run the risk of being pregnant every year, whereas a smart wife could at least have a gap between pregnancies,” said Dr. Wijewardena delivering the Central Bank’s 68th anniversary oration, last week.
In what appears to be an amusing yet cogently suggested relationship between the two institutions heard so far in the case of central banking relationships, the respected economist said by this way the bank can collaborate with the government on matters impacting the economy while the government too will learn to appreciate the important service played by the Bank. Due to deficit financing happening annually through money printing, the Central Bank’s independence has been compromised.
On the other hand, Sri Lanka’s Central Bank has also become subservient to the government due to the Finance Ministry’s Secretary becoming a vote-carrying member of the Monetary Board – the Central Bank’s decision-making body.
However, with the Central Bank migrating into a flexible inflation-targeting regime by the end of the first quarter, next year, the laws are also being put in place to clip the voting powers of the Finance Ministry.
If this legal provision is put in place, which largely hinges on the political will, Sri Lanka’s Central Bank will enjoy greater autonomy over the prices of the economy.
While there is a strong debate happening everywhere for complete independence to the Central Bank, Dr. Wijewardena cautioned that independence without accountability will have adverse repercussion of creating a monster within the sovereign government of Sri Lanka.
“That will not be acceptable to either the political authority or to the public. Hence greater public scrutiny and oversight should be exercised over the work of the Central Bank once it is granted a greater degree of autonomy”, he said citing the best practice in the Central Banks of Canada, Bank of England and the United States.
“It should be recognized that in a sovereign state, there cannot be another sovereign institute,” he noted.