The signature tune does not matter much

By the Economist

Governor Cabraal wants us to dip into our pockets and look into the signatures on the notes to see whether his signature is on any of them. This brings to one’s mind an incident that occurred when a former Governor of the Central Bank was travelling around the country with a close academic friend of his. They stopped at the stall of a wayside vegetable vendor to buy some vegetables. Having purchased about eight varieties of vegetables, the Governor tendered a One Hundred Rupee note.

The professor could not resist telling the vendor that the note handed over to him contained “this gentleman’s signature”. The vendor was unimpressed. He did not look at the signatures on the note, instead handed the Governor the change in the form of two Ten Rupee notes and a Two Rupee coin. Not used to persons not listening to him, the professor told the vendor once again that the two Ten Rupee notes he handed over also contained the Governor’s signature. The man merely smiled. The Governor carefully put the change, including the two coins, in his wallet and drove off.

One wonders how many took Governor Cabraal’s request to dip into the pocket and look at the signatures on the notes to see whether Ajith Nivard Cabraal’s signature is on any of them. More important, were he to stop at a wayside vegetable vendor and buy the same basket of vegetables as his predecessor, he would have to tender a One Thousand Rupee note rather than a One Hundred Rupee note. The change would be rather insignificant and if some coins were returned they would be quite useless to either party in the exchange. The vendor would be quite unconcerned about whose signature was on the note and the Governor would not be concerned in drawing his attention to the signature. In fact it is unlikely to have the signature of the former Governor of the earlier incident either as many Governors and Finance Ministers have held those positions through the intervening years. Interestingly during the same period the Federal Reserve Bank of the US has had only a single change of Governors.

What Governor Cabraal was trying to convey is that there have been no printing of new notes after he assumed office. This refers to a simplistic view regarding the money supply contained in basic economic texts to convey the concept of increases in money as one of “printing money”. The Governor must surely know that what matters is not whether the Central Bank has gone to the printing press to print new notes but whether the supply of money in circulation has increased. The extent of increase or decrease in the money in circulation is what matters, not the signature on the notes or when they were printed.

Why this is important is that the supply of money is a crucial determinant of inflation that is often described in basic textbooks as; “Too much money chasing after too few goods.” This is exactly what has been happening. Figuratively, the printing press has been busy, literally not. It may however not take much time before the Central Bank goes in for a new print and then the Cabraal signature would adorn it. For how long those notes would circulate would partly depend on the rate of inflation, besides other factors such as how much of currency notes are printed, their durability and the Bank’s policy on clean notes.

One must be very sympathetic of the Governor. He is fighting a no-win war. He is placed in a position of heading the Central Bank and the Monetary Board that is responsible for ensuring reasonable price stability. That is not being achieved despite the use of several monetary policy instruments, as the problem is created and generated elsewhere. It is the large fiscal deficit that is creating the problem. The Central Bank is trying its best to extinguish the fires generated by the Treasury. When some fires are extinguished others set the economy ablaze. So the Central Bank has the unenviable task of telling a people consumed by the fires not to worry, the fires are diminishing. Those facing the heat, I am afraid are not feeling any cooler, in fact they are being scorched by prices.

One has to also sympathise with the Governor as he is a political appointee who has to say that the government is doing well. So the growth rate is being quoted as indicating the economy is robust and healthy. The other fundamental indicators are suppressed underneath the carpet. Has the Governor spoken about the unhealthy fiscal deficit, the character of public spending, the increasing domestic and foreign debt, and the high and increasing debt servicing costs, why the currency is depreciating? How can he? He is no Greenspan who could tell the people the naked truth. He is appointed to play a different tune. The Sinhala phrase in translation ‘play jolly tunes even though the ship is sinking’ is indeed the signature tune. But no one is listening.

What are latest facts about inflation? In July the index rose by 17 per cent compared to 13 per cent in June, It was however lower that the January figure of 20 per cent. Although the July Bulletin of the Central Bank indicated that inflation would rise in July but abate in August, this is unlikely as prices of many items have already increased. The prices of petrol, diesel, kerosene, milk powder and wheat flour have increased in the first few days of August.

The prices of many other items like bus transport are likely to increase and so are vegetables and other domestically grown produce apart from imported commodities. There is no abating of inflation and there cannot be owing to the fundamental fiscal imbalances on the one hand, and on other hand, the increases in oil prices. Meanwhile the tight monetary policies are hurting growth and the increased foreign borrowing is heaping burdens for the future.