Establishment blues vs. Central Bank’s independence

Strongly denying the allegation that the Central Bank is politicized, Governor Dr. Indrajit Coomaraswamy last week told reporters in Colombo that it is not his institution but what is politicized is the country’s whole economic decision-making system.

According to Dr. Coomaraswamy, this is the perennial challenge that he encounters in carrying out his role as the governor of the Central Bank.

Hence, he called for a proper balance between economics and politics to employ prudent macroeconomic management as the country is now exposed to global capital markets and credit rating agencies more than ever, who could treat Sri Lanka brutally if the economy is badly handled.

In response to the recent allegations levelled at his institution, Dr. Coomaraswamy stressed he does not see any politicization in the Central Bank as claimed but pledged that he would make an attempt to depoliticize the economic decision-making system plagued by undue political interferences for over 70 years by successive administrations.  

“We need to depoliticize economic decision-making more. In fact, I have seen some commentary that the Central Bank is politicized. I don’t see that. You know I have been here for four or five months and the Monetary Law Act (MLA) is fairly clear in terms of the responsibilities of the Monetary Board and Central Bank,” he said.  

The Central Bank recently came under fire by the country’s vocal Finance Minister Ravi Karunanayake, who repeatedly accused the monetary authority for being politicized while attempting to encroach upon the affairs of the Monetary Board of the Central Bank, risking the independence of the institution.  

The budget for 2017 presented by Karunanayake last month in fact contained several proposals that could undermine the authority of the Central Bank.

The budget proposed to increase the capital levels of the banks and primary dealers while directing the banks to provide loans to areas of the economy the government deemed important. These clearly fall under the Central Bank’s purview as the banking sector regulator.

It also proposed to set up a new payment and settlement system bypassing the Central Bank, which is responsible for any transaction involving the country’s financial system by law.    In a more recent development, the government was reported to have dictated foreign exchange management to the Central Bank as the governor was reportedly questioned by Prime Minister Ranil Wickremesinghe and the finance minister over his failure to control the weakening of the rupee against the dollar, which fell to Rs.150 a dollar last week.  Further, during the monthly economic affairs committee meeting held in the parliament complex last week, both Wickremesinghe and Karunanayake were reported to have charged the Central Bank staff for failing to implement the government policy decisions.   

The Central Bank, according to the MLA, is not set up to carry out the government’s policy agenda but to function independent of any interferences and to give advice to the government if and when required on the economic policy.   But the finance minister appears to think that the Central Bank should only be monitoring the monitoring policy measures that the government wants to implement but not to advise on how to run an economy.

In response to this criticism, Dr. Coomaraswamy defended his staff for discharging a highly professional job at the Central Bank as required by the MLA.

“The members of the Monetary Board and Central Bank staff have been very professional. They work with great technical expertise to carry out the functions that have been given to the Central Bank in the MLA.

So, I don’t see any politicization in the Central Bank.

For me, really the challenge is to break the habit of the last 60 – 70 years, which is the highly politicized economic decision-making in this country. That is really the challenge, to change the balance between politics and economics,” he remarked.  Now, with these developments, many fear that the Central Bank’s independence is threatened as never before but it is ironical that the very people who came to power promising an independent Central Bank have conveniently forgotten their pledges and going in the reverse direction.  Dr. Coomaraswamy, a respected economist, took up the top job in July this year at the request of President Maithripala Sirisena. In his inaugural speech as the governor of the Central Bank he said it was their job to convince politicians that good economics is good politics.

He however acknowledged that politics cannot be taken out of economics completely.

“If it’s worthwhile for me to be here, I need to try to make that change. The Monetary Board is committed in doing that. I think my colleagues in the Central Bank are committed in doing that. That’s what we like to do,” he noted.