Financial Times

Ajith Nivard Cabraal, who took office as governor of the Central Bank last week, responds to a range of topics in his new job in an interview with The Sunday Times FT.

Responding to the controversy over pyramid schemes where he was brought into the picture, Cabraal said he had nothing to hide and has made known his opposition to these schemes in newspaper articles in 2002. Excerpts:

How can the Central Bank play a bigger role in the development of the country?

The Central Bank occupies a small area in the country but I think it has the highest concentration and the best brains of this country in terms of knowledge and overall experiences.

We must ensure that this large concentration of important human resource is used in such a way that we are able to deliver some tangible results for the country.

While playing a statutory role to ensure financial stability in the country, we should also take the role of being the advisor to the government on economic policy and economic affairs very seriously. The Bank must be brought into the sphere of development. Once that happens, the Central Bank while performing its current role will also then be seen as an instrument or a tool for the country which is design, and working on the overall development process and as a partner in the development process.

Does the Bank only trot out figures and economic data and is not proactive in development?

I think it has done work in line with its priorities. It has been clear about regulatory functions, banking systems. A lot of work is being done. I am only suggesting that there would be a little more scope for the Central Bank to use all that information and skill in a way that it would become a catalyst and work in tandem with the government and other agencies and development activity gets accelerated as well.

So while the Central Bank is responsible for its statutory role, it can also play a more vibrant role to bring the fruits of development faster. There is a need for a slight change in focus, attitudes.

The Central Bank should provide that support to the government to achieve the development goals. That I see as a very critical role for the Bank which I might be able to focus and hopefully when this happens, our role would be felt stronger.

It is often said the Central Bank doesn't exercise its independence and reports on what the government wants to hear, what it likes to hear and not the real situation. There is a cloud over the role of the Bank. The opposition has also being saying (last week) the Bank is trotting out some unrealistic figures on the economy. Is it acting independently? Any comment?

That's an important point. First we need to understand what is meant by independence. As a high level institution in the country, it has to work in line with overall government policy. If the Central Bank works contrary to the government, there would be a huge confrontation; that would be extremely bad for the economy.

These policies of both have to be good for the country. Secondly what goes on behind closed doors at the Monetary Board for example - there is a possibility that these representatives would have certain differences. But these issues are discussed and what is brought to the table is a decision that would benefit the country. In the same spirit, take the corporate sector. Not all the directors would agree with each other. There are some independent directors, there are those working in the institution. There could be a healthy debate that would take place and finally the best decision for the organization is taken. In the same way the Central Bank too has a system where there is space for people to come in, discuss, thrash out issues. These are all highly qualified people who know their subjects and in such an environment there are bound to some tensions. But the fact remains that they are able to resolve their differences and come to some common understanding. So there are times when there is some disagreements but its best that such situations are handled in a way that the parties come to some consensus and that's how the Central Bank works.

That doesn't mean those from the government or the Central Bank loses their independence because they agree. For there is strong discussion and fair debate and only then common agreement reached.

Hence some tend to believe that independence is seen only when you have a fight in the open. Now what would be the public perception of a company if two directors fight or argue in the open? That's not good for the company. Similarly it's not good for open fights between government agencies and other agencies. There should be sufficient discussion, space for people to express their views. Thus the suggestion that the Central Bank is not independent is not fair because there is discussion that takes place and all shades of opinion considered – behind closed doors of course – and then a solution arrived at.

On banking and non banking institutions and weakness in regulation.

Regulation is not an easy task. There could be some practices that are undertaken by institutions that are difficult to detect immediately. All over the world we find there are failures of financial institutions because some people have used the system to their own advantage. The Central Bank has to be vigilant.

Also there are other ways in which this could be done like for example there are disclosure requirements to ensure the public at large is also able to keep track of what is going on and this is a market-driven regulation. Then there is corporate governance. The regulator has powers and there are various others ways in which regulation is practiced.

There are many small companies that have collapsed and you have shown some experience in the past towards business recovery and reviving failed institutions. Can the Central Bank play a role in business recovery?

There is a huge economic price that we pay for business failure. Failure often is not caused by fraud. There are many instances of failure because of bad decisions, bad environment, actions by others that one has no control over, bad lending decisions and so on.

Thus when some businesses fail, not only do people lose their jobs but the loss is also of foreign exchange to set up that company, huge investments get lost, land and assets get locked up. This is a huge price to the economy. Banks also carry non-performing loans which increases the cost of capital, borrowing becomes more expensive.

Business recovery is a professional service practiced across the world. When businesses fail, there are institutions that come in and help to revive the firm. In some countries, when companies default even once, the banks step in with a team of consultants and help them from the beginning of the crisis (unlike here when help comes at the tail-end of a crisis). Banks overseas don't resort to parate rights. In the first instance of trouble, the banks come in to help the company to overcome the crisis. That's what is needed for Sri Lanka too.

It's in the bank's interests that companies do well for loans to be repaid and keep the cost of credit down. Unfortunately we have not reached this stage. Maybe we should encourage banks to resort to practices that would help the industry and guide companies.

On pyramid schemes, how would the Central Bank act?

Even before the Central Bank stepped in I wrote in the Lankadipa in 2002 about the dangers of these schemes. When people lose money from these schemes, it becomes a problem. Foreign exchange losses are also a problem because a small country like us cannot afford to lose foreign exchange. But in many countries there are laws to tackle multi-level marketing schemes against those involved. What is important is enforcement of the law to ensure this doesn't happen. Law enforcement would be a deterrent. These practices should be discouraged through proper enforcement of laws and public awareness.

What are the issues confronting the new governor - interest rates are high, foreign reserves are said to be low - and growth could be a problem?

I have a clear message. Sri Lanka is growing whatever what some people may say. There is a very clear growth pattern and that is improving for the past several quarters. If it continues, it would be good for the country. Secondly the unemployment figures are looking good which is also a good factor. I do agree some outside issues like for example oil prices which are very, very high are a challenge for any economy. There could be some repercussions there.

But at the same time economic management is all about risks, managing it, mitigating it, looking for opportunities and moving forward. Thus there is no clear cut method by which you can say this is how I would manage the economy for the next six years.

There are always new challenges. We need to have the people, the proper information to handle such situations. That's the most important thing.

If we are able to be on top of the situation notwithstanding the challenges – maybe we don't know what would happen next – but we must be prepared and we need to have good reserves.

Our reserves are reasonably good and there is nothing to worry as we have little over 2.7 months worth of imports. Nothing to get alarmed about. Our foreign exchange rates are also stable; so is imports and exports, and revenue collections.

Naturally the opposition would want to focus on some areas and I have no problem with that. Overall there are many good things going for the economy.
Sri Lanka is at a discount. Our prices, our infrastructure … sooner or later that is going to change.

Those who come in now would benefit from the discount. If we didn't have a conflict, these prices would be at a much higher level. If you invest now, you can benefit when things improve. Problems that we have won't last for long, Things are bound to improve. Things can happen at anytime.

Those who take the risk and invest now will enjoy the benefits later. Those who invest now would benefit because you get tax holidays and many other advantages. If Sri Lanka is booming you can't expect this. Then it would be a take-it-or-leave-it policy.