Recent developments have blurred CB independence: Top economist
Two recent developments in Sri Lanka have blurred the independence of the Central Bank of Sri Lanka (CB), a top economist said this week.
Economist and former CB Deputy Governor Dr. W. A. Wijewardena said that one was the inability of a bank to raise public opinion to support it whenever there are attempts by political authorities to compromise its independence and the second is the wider role which central banks have assumed in addition to their main mandate of establishing price stability in the respective economies.
He was delivering the CB’s 68th Anniversary Oration on the topic ‘A revisit to Central Bank Independence: How to Resolve the Emerging Issues?,’ held at the CB headquarters in Colombo.
Stressing on CB independence, Dr. Wijewardena said that today central banks enjoy full to partial autonomy, but since two to three decades, CBs globally have been striving to gain greater independence.
Dwelling on the long history of the independence of the central bank, he said that the world’s oldest existing central bank, Sweden’s Sweriges Riksbank, established in 1668 ran into problems when it refused to finance King Gustav HI’s military operations and the King reacted issuing his own currency through the Swedish National Debt Office. It forced the Riksbank to become stagnant till 1802 which was a high price a central bank had to pay for refusing to accede to the demands of a recalcitrant political leader.
He said that John Maynard Keynes, a part of the Chamberlain Commission of 1913 submitted a memorandum on the establishment of a shareholder owned Central Bank in India. Keynes, he said, advised that the Secretary of the State, though he was the official behind, has only the final word about the work of the bank.
Thus, Dr. Wijewardena said that the Secretary was the adjudicator of last resort, the bank’s day to day operations, as recommended by Keynes and should be free from the interference of both the government and the shareholders, since it might run counter to the general interest.
He said that the attempts of the CBs for greater independence helped countries to fight inflation more successfully, but he said that it was not the consensus among the mainstream economists. He said that John Exter, the architect of Sri Lanka’s CB in terms of Monetary Law Act proposed the placement of the Secretary to the Monetary Board and the criticism has been that the Finance Secretary acting in self-interest would get the bank to fund the budget through accommodative monetary policy.
He pointed out that the independence of a central bank cannot be ensured just by a legal arrangement as it is dependent on how those in the central bank view independence as a necessary safeguard on the one hand, and on the appreciation of that stand of the bank by all others, on the other.
The experience globally, he said has shown that the central banks which have produced more money than necessary have got into trouble by causing inflation to destroy their economies and have gone through painful currency reforms.
Dwelling on ‘scandals and loss of trust and reputation,’ he said that political authorities have a natural inclination to abuse the power of a central bank to print money just by making book entries. The management of the CB on prudent monetary policy should object to such political demand.
He said that hostility has already been built among civil society against well-published scandals occurrences that have happened in certain central banks. Some noted occurrences in the recent past were: the former Governor of the Central Bank of Sri Lanka is reported to have defied an order by the Magistrate Court for him to appear before the Police to give a statement in a case involving alleged insider dealing in the government securities market; the Governor of Bank of Latvia has been arrested by Police for alleged bribe-taking; the Governor of the Bank of Negara Malaysia was forced to resign from the post for his alleged involvement in a land sale during the previous administration of the country; the Governor of the Central Bank of Afghanistan is reported to have fled the country after his alleged involvement in a scandal in a major commercial bank and the Governor of the Bangladesh Bank had to resign from the post after hackers had siphoned off US$81 million out of the bank’s foreign reserves.
He pointed out that CB’s independence without accountability would create a monster within the sovereign government of Sri Lanka and greater public scrutiny and oversight should be exercised over the work of the CB.
In summing up, he said that the relationship between the government and the central bank should be that of a husband and wife and rather a wife to be smart than good as accommodating 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.