Editorial

Both the Finance Minister and the Central Bank Governor are at pains to say that what is happening is beyond their control. The rupee has crashed from Rs. 163 to Rs. 170 a US dollar in one week. They are reassuring the country that the sharp drop of the rupee does not necessarily reflect the state of the economy. Various explanations are being given ranging from the “elevated tension in the global economy” due to tensions between the US and China, higher oil prices due to Iranian sanctions, the US Federal Reserve adjusting interest rates and monies from emerging markets worldwide going back to the United States. In short, all the blame could be placed at US President Donald Trump’s White House doorstep. The Government takes cover in the fact that many other economies are facing the same crisis, and the Finance Minister was upfront in Parliament when he said the situation could get worse.

Part of the problem is home-made as well. Exports have dropped from 33 per cent to 12.5 per cent of GDP, and the imports of gold duty-free, and containers full of vehicles etc., have drained the country’s foreign currency reserves which are being sustained somewhat by foreign workers’ remittances and tourism earnings.

In the midst of all this, one of the last bastions of autonomous institutions in the country — the Central Bank — has taken a different tumble paying the price for its own excesses, especially of the past decades by political appointees. The Government has decided to take away one of its primary functions — that of raising borrowings by way of sovereign loans on behalf of the country. This task will be handed over to the Treasury (Ministry of Finance) very soon.

Whether this is a wise decision is an arguable one. Some might say it is to jump from the frying pan into the fire given the fact that the Treasury has not been immune to political diktats and control. The Ministry of Finance has, for years, been under the control of different Heads of State and Government after the J.R. Jayewardene presidency. The result has been that some questionable secretaries have been the ones who ‘ran the show’ under cover of the President cum Minister of Finance who could easily be hoodwinked on matters of high finance and policy. We have also had at least one President cum Minister of Finance who was found guilty by the Supreme Court of corruption and abuse of public trust, and fined for helping a friend make a quick buck.

It was probably during the last administration that the Central Bank kowtowed to the political masters (who headed the Ministry of Finance) and the two institutions which were meant to have separation of powers and duties in the finances of the country, danced the tango together.

They played the ‘merry devil’ in using the savings of hundreds of thousands of employees in the private sector at the EPF (Employees Provident Fund), gambling with their monies in dead-duck Greek bonds, and by artificially puffing up the stock market allowing a few of their financiers to become multi-millionaires overnight in what has become infamously known as the ‘pump and dump’ fiasco. The Central Bank bought properties in America and spent lavishly in a futile bid for the Commonwealth Games. They ran amok.

Parliamentary control of these shenanigans at the time was minimal except for some reports emanating from the Parliamentary oversight committee COPE which had no worthwhile use. It was the Supreme Court that showed some spunk at the time and at least tried to rein in a runaway Government by asking that the then Secretary of the Treasury be sacked. But the then President had none of it for reasons best known to himself.

Then came the present dispensation with a serious error of judgement in appointing a questionable character to the high post of Governor of the Central Bank. The man is now in hiding overseas while his son-in-law languishes in remand prison. The politician who collaborated with the Governor from the Ministry of Finance in what turned out to be a ‘scam of all scams’ is in trouble himself and his prospects for a comeback to politics have dimmed in the circumstances.

The Government, however, deserves some credit, at least as a mitigating factor, for acting on what was a horribly corrupt exercise. The previous administration would have certainly allowed such perpetrators to go scot-free.

Technically, it is the Treasury that raises Government loans, but the Central Bank is its agent. No longer will it be so. Once amendments are introduced to the Monetary Law Act, it reduces the clout of the Monetary Board (which gives directions to the Central Bank) and subjects the appointment of the Governor of the Central Bank to the Constitutional Council.

Not that appointments by the Constitutional Council are the best. Take the case of appointing dual citizens as the country’s ambassadors without sorting out conflicting laws on the issue. It is clear that the Council is afraid to clash with Presidential nominees and takes the path of least resistance.

There are others who, however, say it is the right thing to do. They believe that relieving the Central Bank of handling the Public Debt Department, or acting as an agent to raise money for the Government via Treasury bonds is the right way to go. The Central Bank, they argue, should be allowed to carry out its core objectives such as economic and price stability (the maintenance of a low level of inflation while attaining macro-economic equilibrium) and financial system stability (the maintenance of financial systems as a whole).

The Central Bank’s maintaining of policy interest rates will come into conflict with itself when the Bank is handling Treasury bonds on behalf of the Treasury. Separating the two functions will allow the Central Bank to act independently. The present practice of the Finance Ministry getting the Central Bank to fund the Budget through accommodative monetary policy will cause fiscal policy to override monetary policy.

One suggestion is to set up an independent Authority for the Public Debt Department deploying professionals and experts rather than handling it through the Finance Ministry. There is a dearth of such personnel at the Finance Ministry capable of handling Treasury bond operations and associate functions. But whether the political hierarchy, be they in the Government or the Opposition, would really want to have such an autonomous Authority, is another matter.