CB’s response on economy must be countered
It is with interest (perhaps with amusement) that I read the response of the Central Bank (CBSL) titled “Central Bank rejects dismal picture of the economy” to Dr. Nimal Sandaratne’s (Nimal S) article titled “External Finance and Fiscal consolidation: What is the real position?” which appeared in the Sunday Times on July 21. Nimal S’s short response to CBSL was that in the interest of the country he hopes the optimistic scenario of the CBSL would prevail. Nimal S is a disciplined professional economist. I am none of that.
Nimal S has stopped analyzing the predicament the economy is confronted with today. I find fault with him for failing to attribute causes. The CBSL has filled that vacuum in its response. It has given causes (unfortunately they take the form of explanations and excuses). I read the response of the CBSL very carefully. I was amazed to find that the CBSL, by and large, is in agreement with what Nimal S stated rather than denying. While not disagreeing with what Nimal S has stated, it has gone to lengths by attributing causes for the situation. When I finished reading I could not figure out whether the CBSL is arguing for or against Nimal S.
The CBSL has responded on five specific points categorized from (a) to (e). Under (a) CBSL has not stated a word to deny what Nimal S said about depreciation of the rupee and outflow of funds. The CBSL states that it is a blip in international financial markets which should not have been highlighted. But it gives more publicity than Nimal S to this blip. The CBSL explains that depreciation of the rupee and the fund outflows was not due to forex demand but due to import demand. What does this mean? Does it mean that ‘if it is due to forex demand we (CBSL) are responsible but it was due to import demand for which Ministry of Finance (MF) is responsible”? The CBSL clearly detaches from the Government and points the finger at the MF. The CBSL appears to have forgotten its role as economic adviser to the Government. The CBSL, on the one hand, denounces Nimal S for taking the daily performance of the stock market as the indicator of the perception of the financial position and on the other hand, uses the very same indicator to ridicule Nimal S stating that the bourse has risen to a 3 week high within just three days. My Seeya, if alive would have said when one wants to eat, a monitor (varanus salvator) would turn into an iguana.
(b) Discusses the external reserve position. The CBSL response commences with a reminder of Nimal S’s previous position as Director, Economic Research. On the one hand the CBSL has forgotten its professionalism (If anything is still left). On the other hand the CBSL unwittingly is adding another feather in Nimal S’s cap. How does CBSL respond to Nimal S? “……because external reserves are an asset of the CBSL and the debt service payments are liabilities of the government”. Assets are ours; liabilities are theirs. What a brilliant economic advisor. Does one need enemies when flanked by such advisors?
(c) Is on foreign debt. The CBSL agrees with Nimal S and says, “it is quite natural for foreign debt levels to rise and for the economy to experience an external current account deficit”. Then it goes onto conclude stating that the columnist (Nimal S) would have realized the sharp deceleration of foreign debt accumulation (which is unnatural in CBSL norms) over the years. The CBSL does not counter Nimal S’s claim that foreign debt is being on an increasing trend but, states that the country is moving away from traditional borrowing practices. The CBSL appears to believe what is faulty with foreign debt is not the increasing trend but traditional borrowing practices. Economic Advisor (CBSL) states that it is advisable to assess the trend of foreign debt as a percentage of GDP. But my simple mind says what matters is not the percentage of GDP which is measured in local currency since foreign debt is repaid in international currencies.
(d) Is on fiscal policy strategy of the government. My economics lecturer categorically mentioned that the CBSL is responsible for monetary policy whereas the responsibility for fiscal policy lies with the Treasury. In this instance the CBSL has taken the responsibility for fiscal policy moving away from its previous detachment from the government. The CBSL agrees with Nimal S and states that achievement of fiscal target in 2012 became challenging due to a combination of factors including comparatively high interest rates. Has the CBSL forgotten that interest rates are very much a part of monetary policy? The CBSL is disappointed over Nimal S’s claim that the fiscal deficit is underestimated by some “creative accounting”. Nimal S has not explained what this “creative accounting” is but the CBSL does. I have no intention to reproduce what CBSL has stated but it clearly explains how the deficit was underestimated by creative accounting of its own or borrowed from IMF. If a reader had any doubts on what Nimal S stated about “creative accounting” the CBSL has clarified it. The CBSL admits that it has left out expenditure of public enterprises. It has ignored the impact of state enterprises upon the budget and drain on Treasury resources. COPE, Auditor General and Treasury have continuously drawn serious attention to management and efficiency issues of such enterprises. The CBSL while admitting an increase of the budget deficit during first four months depends on expectations and wishful thinking to improve the situation.
(e) Deals with Nimal S’s claim on a large unhealthy trade balance. The CBSL has not tried to deny this but used the space to ridicule and insult the columnist forgetting its professional ethics. It is not even worth the space it used and deserves no comment. The CBSL states Nimal S’s views are amateurish, assumptions are unrealistic and predictions are wild guesses. A reader gets confused whether the CBSL is making such comments while looking at its own image on a mirror. It would be interesting to identify what audience the CBSL addresses. Is it the President or the public or the professionals or the intelligentsia? The CBSL is trying to take all these parties on the garden path. There is a saying that one cannot fool everyone all the time and mind you none would ever be able to fool the president and the intelligentsia.
In terms of Monetary Law Act the CBSL’s twin objectives are (a) economic and price stability; and (b) financial system stability with a view to encouraging and promoting the development of the productive resources of Sri Lanka. It is worthwhile to take a look at the Vision Statement of the CBSL.
“A credible and dynamic central bank contributing to the prosperity of Sri Lanka.”
The vision clearly indicates that the Bank is deeply committed to contributing to the prosperity of Sri Lanka. The term prosperity has a wide connotation: enhancement of the quality of life of people through sustainable wealth creation and inclusion of all segments of the society in enjoying the benefits of development. The Central Bank facilitates this process by ensuring economic and price stability and financial system stability while providing prudential and pro-active policy recommendations, as the Advisor to the Government on Economic Affairs. In doing so, the Bank acts with the highest degree of integrity and professionalism, earning respect for its objectivity and apolitical stance.( http://en.wikipedia.org/wiki/Central_Bank_of_Sri_Lanka)
One may examine whether the CBSL has lived up to the expectations of its Vision Statement. Has the Bank acted according to its Vision and earned respect? The Central Bank has to stand tall not in terms of the height of its building but by filling its empty corridors with professionals of high integrity. The response of the CBSL raises doubts of its professionalism, objectivity and apolitical stance.
I am happy about one good thing done by the CBSL through its response. Intelligentsia of this country has been maintaining a deafening silence. I have read somewhere that the biggest crime is the silence of intelligentsia.
The CBSL’s response is an invitation (one might see as an insult) to intelligentsia to break its deafening silence. I hope the intelligentsia of this country will grab the CBSL invitation and break its silence.
(The writer can be reached on
chandra.maliyadde@gmail.com)