Why the incumbent CB Governor is not fit and proper for reappointment?

 

The six-year term of the CB Governor that commenced on July 1, 2016, is to expire on this June 30. The present Governor has been appointed on April 07 for the balance period due to resignation of the former Governor on April 4.

At the BBC interview held on last 17, the present Governor has stated that he would expect to serve in the next full six-year term, and he would not have accepted the present post if he were to leave after two months of service.

Meantime, a highly politicized social media campaign prevails forcing the President to appoint him for the new term of six years. They state the reason as the success of the Governor having already stabilized the economy during this difficult time. Some have even threatened to lead another round of social protest campaign if he is not reappointed. Bank depositors who have temporarily benefitted from the extraordinarily high interest rate policy of the Governor are also seen in the forefront of this social media campaign.

Therefore, this article is intended to establish that the present CB Governor is not a fit and proper person to be reappointed on the ground that his policy actions so far in fact have led the economy from the destabilization to the bankruptcy and involved in a number of statutory violations.

Non-conduct of the Fit and Proper Test on appointment of the Governor, Monetary Board Members and Executive Officers of the Central Bank

Appointment of persons as Directors, CEOs and Officers performing executive functions of licensed banks in Sri Lanka should be made only after obtaining the written approval of the Director of Bank Supervision in terms of the criteria laid down in the Banking Act for assessing the fitness and propriety of such persons. The specific reason for such a test is to ensure that banks which carry on business on money belonging to others (depositors and shareholders) are governed by persons of high integrity and honesty.

However, it is unacceptable that, although the business of the Central Bank covers the printing of public money, its circulation and regulation of banks as part of money circulation through deposits and credit, officers of the Central Bank are not subject to such fit and proper tests. It is noted that the Monetary Board in the middle of 2017 agreed to my proposal to adopt same Banking Act criteria for this purpose and, however, it has not been implemented so far.

John Exter who was the architect of the Central Bank in 1949 has stated in his report that the person appointed as the Governor should be a man of unquestionable integrity and responsibility.

Therefore, it is necessary that the Minister of Finance expeditiously implement such fit and proper criteria for appointment and removal of Central Bank officials. The appointment of persons with professional integrity and responsibility is especially important in response to unprofessional conduct of the CB Governor and Monetary Board Members seen recently before political committees of the Parliament. The criteria should ensure that no person charged with questionable conduct is appointed.

Disqualification of the Present Governor for Reappointment

The relevant evidence is presented below in 20 items to establish his disqualification. Some items are statutory violations that provide even for removal of the Governor or a Board Member on any occasion. The most of this evidence has already been published in detail in articles released by me in the blog, economydiscovery.com

1. The interest rate hike of historic 7% on April 8 to 13.5% and 14.5% causing the Government and private sector to bankruptcy in the current crisis

At the media briefing on that day, the Governor stated that such rate hikes were very easy tasks for the Monetary Board Members. In support, one of his monetarist colleagues even proposed further rates hike to 25%. The imprudence of this abrupt policy action on credit delivery in current circumstances is shown as below.

As Treasury bill rates rose by 9% to around 24% within two weeks, the Central Bank forced banks to push the deposit rates also up in that line. In contrast, the Governor later commented that the market rates overshot, and he would take actions to correct it. Therefore, it now appears that he uses various insider techniques to push down the Treasury bill rates through arranged EPF bids to auctions. 

This is seen by the subsequent reduction of yield rates to around 20%-22% level where long-term bill and bond auction rates have been brought down below the 3-month bill rate while the acceptance of 182-day and 364-day bills has significantly risen in contrast to the past trend of acceptance of almost all from the 92-day bills which is the normal market behaviour during times of rising inflation and interest rates.

The increased cost of rollover of the Government debt will cause further debt service problems and tax increases in the near-term. For example, after 7% rate hike, the Government has raised Rs. 816.7 bn through weekly auctions of Treasury bills alone at an average yield of 23.3% as compared to the pre-rate hike auction yield around 15%. Therefore, the near-term debt and tax burden will increase by this 8.3% additional cost of funds.

Such a rate hike violates the international standard of gradual rate hikes by 0.25%-0.50% at a time over a fairly long period of time to ensure that their macroeconomic impact is felt in an orderly fashion. However, this rate hike is second only to the rate hike of 15% to 25% on June 3 by the Central Bank of Ukraine to control inflation rising to 20%, despite the projected decline of the economy by 45% in the middle of Russian invasion since February 24.

Although such a high interest rate policy is cited for inflation control, the sources of Sri Lankan high inflation are the global Corona pandemic-caused supply chain disruptions and acute shortages of imports and nearly 80% increase in the exchange rate consequent to the failure of the Central Bank to manage its foreign currency reserve. 

Therefore, the fact that this inflation could not be controlled by the interest rates hikes even at further higher levels is the common knowledge. That is established by the continuous and faster rise in inflation, despite the rate hikes of 9% in total and significant monetary tightening so far since the mid of August 2021 where such monetary tightening has pushed both the borrowers and lenders towards bankruptcy.

Further, Monetary Law Act (MLA) provisions do not provide for the Monetary Board to conduct an exclusively inflation targeted monetary policy where the cost of living is only one factor to be considered in determination of the national monetary policy.

2. Default of Government Foreign Debt on April 12 by the Central Bank as the Public Debt Manager causing the country to international bankruptcy in violation of the Constitution

The default has been announced without the permission of the Parliament who controls the public finance in terms of the Constitution. As the national budget for 2022 covering debt and debt servicing had already been approved by the Parliament in November 2021, the default of foreign debt by the Central Bank as announced by the Governor along with the Secretary, Ministry of Finance, as a soft default is unlawful.

Further, the duty of the public debt management is at the hand of the Superintendent/Register of the Public Debt and, therefore, whether the Superintendent has taken lawful actions to manage and restructure debt within Sri Lankan laws inclusive of the Active Liability Management Act passed by the Parliament in 2018 has to be established in the Parliament before announcing such a debt default and calling for proposals from international firms for this purpose.

In May 2016, a US Treasury technical assistance programme for improvement of debt management inclusive of commissioning a secondary market electronic trading platform and drafting a consolidated debt law with a resident consultant initially for two years supported by visits of other subject experts  was received free. As the Central Bank team led by the present Governor at that time was dead against this consultancy for improvement of the auction system and transparency, the fate of the consultancy and trading platform is not known. The interim arrangement of the Bloomberg trading platform free of charge also has been abandoned. Finally, fondly private placements have been built in the bond auction system and it has now been extended to Treasury bill auctions too from the last auction held on June 22.

Therefore, the present Secretary to the Treasury being a Deputy Governor with a long Central Bank service until April 7 and the Governor being the Senior Deputy Governor until the end of 2020 who have actively engaged in debt management including the issuance of all Sovereign Bonds should know the due process before the default.

As one US investor in Sovereign Bonds has filed legal action in the US Southern District Court of New York against the Sri Lankan Government on June 21, relevant legal documents on decision-making on the default have to be filed in the Court to establish the due legal process. Therefore, this unlawful and arbitrary decision-making to default of foreign debt by two high-ranking government officials would not provide for any settlement in Court. This unlawfulness including discriminatory nature of the default has been stated in the Complaint in the above Court case too.

3. Forcible and imprudent action to increase deposit interest rates against banking business practices

As bank deposit interest rates did not rise in the quick phase of the Central Bank rate hike of 7%, it is learned that banks have been forced to raise deposit rates where a Monetary Board Order also was issued. This deposit interest policy has led the Governor to become highly popular among the depositors and it is learned that the policy was intended to mobilize their support for his re-appointment.

However, banks have confronted a sudden increase in the cost of intermediation as many depositors rushed to banks in ques to terminate their fixed deposits and reopen them at higher interest rates as much as 16%-18%. This together with resulting increase in lending rates have raised the systemic risk in the economy. Such undue focus on the deposit rates is a monetary policy violation in the present policy model. If the Governor wished to do so legally, the Monetary Board could have used MLA provisions to direct the banks on maximum deposit rates.

4. Outright rejection of a proposal to consider concessions on loan repayment to entrepreneurs affected by the present crisis.

The reason cited by the Governor for this rejection is the injustice to depositors as such concessions would have to be provided at costs to depositors. This is incorrect as such concessions involve in rescheduling and restructuring of loans. In such crisis situations, concessions are primarily required to bank borrowers and not to depositors. Therefore, this statement also has boosted his popularity among depositors.

5. Unlawful and fictitious guidance issued on 12 and 13 of May to determine the inter-bank spot exchange rate for the US Dollar in a range of Rs. 2.60 from the mid-point of Rs. 360

This immediately led to an artificial decline of the exchange rate by 3% and spread a social media news item commending the Governor for being able to strengthen the rupee.

Even general public knows that such a fixed exchange rate cannot be maintained without an active bank-based foreign exchange market and liquid foreign reserve with the Central Bank. Therefore, this guidance rate is same as the rate of Rs. 200 that prevailed up to March 7. Further, the MLA does not provide for such guidance rates or exchange rate control on the inter-bank foreign exchange trades.

However, the Governor has got the Central Bank Communication Department issue a press release on June 6 to mislead the general public by stating the benefits accrued from this guidance exchange rate such as stabilization of the formal foreign currency market, the increase in foreign remittances to the banking sector and the decline in the informal foreign exchange market including narrowing down the exchange rate margin. However, no supporting statistics have been provided so far.

6. The continuation of money printing at a higher and faster phase for lending to the Government in violation of the MLA

At his first media conference held on April 8, the Governor blamed the past two Governors for high inflationary pressures as the result of money printing based on modern monetary theory to support a home-grown growth model, despite his resistance as the Senior Deputy Governor at that time. Accordingly, he promised to cut down the Central Bank Treasury bills portfolio to reduce the money printing independently for controlling the inflation.

However, while the inflation is further rising, he has been increasing the money printing further not only by buying Treasury bills outside the weekly auctions but also by introducing a new unlawful system to issue Treasury bills to the Central Bank whenever the General Treasury requests additional funding for routine Treasury operations. Since April 8, the net printing of money under the first system amounts to Rs. 236.8 bn while the printing under the new system is Rs. 183.1 bn., altogether Rs. 420 bn or 32.1% of the total money printing on Treasury bills since January 2021 to date.

In such crisis situations, nothing is wrong with the Monetary Board printing money to safeguard the stability of the economy through open market operations and provisional advances to the Government as provided for in the MLA. However, the money printing to the extent and the manner stated above while inflation is galloping is in violations of the MLA as well as the professional and public promise given by the Governor on April 8.

7. Continuance of the unlawful standing deposit facility

The MLA does not provide for acceptance of deposits by the Central Bank on payment of interest. The instrument stipulated in the MLA is the open market operations on trade of government securities. This deposit facility encourages banks to mobilize deposits at lower rates from the public and redeposit the proceeds with the Central Bank overnight at higher rates to earn a risk-free profit. Therefore, banks’ intermediation role in the wider economy is largely disturbed. 

For example, the standing deposit facility rate at present is 13.5% whereas even bank fixed deposit rates are mostly around 11%-12%. Therefore, banks, while depositing their excess liquidity daily at the standing deposit facility, borrow interest free from the intraday liquidity facility (ILF) of the Central Bank available for payment purposes. 

Such ILF borrowing per day was about Rs. 208.5 bn in the year 2021, a significant increase from Rs. 66 bn. in 2020 (i.e., 216% increase). The Central Bank has printed nearly Rs. 12.4 bn to pay interest on standing deposits in 2020 and 2021.

8. Retention of the Central Bank profit in 2021 unlawfully without remitting to the Government

The calculation and distribution of profit of the Central Bank are stipulated in the MLA. However, the Monetary Board adopts a different method for this as unlawfully recommended by the present Governor in 2016 to satisfy the accounting professions in violation of both MLA and generally accepted central bank financial reporting standards. Accordingly, a distributable profit of Rs. 27 bn for the year 2021 has been retained in the capital of the Central Bank, despite dire funding problems confronted by the Government. The total profit calculated in terms of International Financial Reporting Standards for the year 2021 is about Rs. 158 bn where only Rs. 30 bn has been remitted to the Government. 

In addition to Rs. 27 bn reserved in capital funds, another Rs. 84 bn of unrealized profit also has been transferred to the Central Bank reserves. As such, it is questionable why the Central Bank needs such a huge reserve base in violation of the MLA. Further, the present Governor who submitted the Annual Report for 2021 to the Minister of Finance in terms of the MLA has not signed the Central Bank's financial statements given in the Annual Report. Therefore, a question arises as to who accepts the responsibility of these financial statements.

9. Appeal for foreign currency donations in violation of the MLA

State institutions or their officials can accept or offer donations on accounts of the institution only if the relevant statutes provide for such donations. The MLA does not contain any provisions for such donations because they give effects to money printing and the country’s monetary conditions outside the monetary policy.

However, the Governor on April 12 appealed donations in foreign currency from Sri Lankans living abroad for the purpose of financing importation of essentials such as food, oil and medicine. Next day, this appeal was extended to all well-wishers abroad. He cites the reason for the appeal as hardships faced by people from the social, economic and financial distress due to the long-lasting impact the Covid-19 pandemic, global imbalances and macroeconomic imbalances of the country. However, the MLA provides only for monetary policy actions to deal with such adverse economic conditions where the donation is not an authorized policy action.

Further, the fact that the donations received on his appeal so far are only about US$ 82,440 shows that the Governor is not an internationally recognized person to receive foreign financial assistance to address the country’s present economic distress or the crisis. The protracted delay in receiving a so-called IMF bailout package is also a testimony to this.

However, the Governor has been unable to implement any monetary policy actions to promote much needed inflow of worker remittances at this stage. It is common knowledge that the significant reduction in worker remittances due to highly over-valued exchange rate kept by the Central Bank is a major reason for the acute foreign currency shortage in the country. 

In fact, he recently commented that it was the duty of the Sri Lankan workers abroad to send remittances to their relations and dependents through formal channels after paying tax in respective countries and, therefore, any grant of concessions from Sri Lankan taxpayers’ money to encourage remittances was not justified. It is reported that this also has led to further dissatisfaction among the Sri Lankan workers abroad and to increase remittances through informal channels at competitive exchange rates.

10. The Governor’s threat to the Government on May 11 to resign unless the political stability is restored in two weeks

This statement made at a media conference just after a month of his appointment is a highly irresponsible statement in times of the foreign currency crisis and economic instability of the country. However, the political instability referred to in his statement did not harm any functions of the Central Bank. The executive President and the Parliament were in operation whereas the resignation of the Prime Minister and Cabinet was only a temporary event in response to the heightened protests by various public groups.

However, he stated that any person would not be able to perform the duties of the Governor in such circumstances without political stability. Therefore, this alert could have destabilized not only the management of the Central Bank but also smooth operations of the banking system. The later revelation is that he made this statement to have political gains from the new Government pending in the political crisis.

11. The suspicious statement made to the COPE on May 25 that an IMF loan could not be received in April 2020 due to Government’s non-agreement to restructure debt as required by the IMF

It appears that the present Governor as the Senior Deputy Governor overseeing the dealings with the IMF at that time may have acted to prevent from receiving an IMF loan by arranging such a debt restructuring condition for Sri Lanka. This suspicion is raised based on several facts stated below.

First, the IMF granted nearly US$ 171 bn to 90 countries confronted with the Corona pandemic under its Rapid Financing Instrument and Rapid Credit Facility and relief on repayment of IMF loans to 31 countries. Among them were the countries with poorer debt profile and economic growth than Sri Lanka. On March 17, 2020, the IMF Managing Director informed through the Blomberg media that the IMF would allocate US$ 50 bn worth funds to help member countries affected by the Pandemic without normal conditionality and ready to utilize its full lending capacity of US$ 1 trillion, if necessary, and requested member countries to apply credit facilities without delay. 

If the IMF had required debt sustainability and restructuring conditionality from those countries, many countries would not have received IMF facilities, given the global lockdowns and administrative difficulties that prevailed at that time to satisfy such inhuman conditionality.

Second, former Governor Coomaraswamy, now a member of the Advisory Panel on Debt to the President, stated recently that Sri Lanka could have secured an IMF facility in December 2020 if requested as there was no restructuring condition at that time. Further, the IMF observation on unsustainability of debt was issued only in annual Article IV Consultation Report issued on March 25, 2022.

Third, the present Governor has quite experience in securing IMF facilities as he was involved in securing the two largest facilities amounting to SDR 2,724.3 mn out of 16 facilities obtained so far since 1965. Further, he and the present Secretary to the Treasury being Alternate Executive Directors in the IMF had enough inside experience in the IMF to secure a new IMF facility supported by the sitting Alternate Executive Director released from the Central Bank at that time.

Fourth, the preset Governor visited the IMF World Bank Spring Meetings April 18-22 and has requested a facility from the IMF under Rapid Financing Instrument. He would not have made this request if a restructuring requirement had been effective on Rapid Financing Instrument.

12. Making allegations against former Central Bank Governors and high-ranking Government officials for the present economic crisis at the Parliamentary Committees

It is noted with concern that he also was involved in recommending and implementing monetary, exchange rate and reserve management policies, IMF dealings, Sovereign Bond issuances and fiscal advice to the Government for more than a decade until the end of 2020 whereas four Governors and Monetary Board since 2006 were guided by him on economic subjects. Therefore, he is also accountable to the current economic crisis if it has been caused by the failure of the relevant public officials.

Therefore, it is highly unprofessional for the post of the Governor to accuse other Governors and high-ranking officials who worked with him on his advice and cooperation to implement government/national policies loyal to the respective governments from time to time for decades. 

It noted that all those officials implemented those policies on the ground of circumstances and the set of information prevailing at those times within the statutory authority available with them as mostly assisted by the present Governor. Therefore, aiding and abetting present political leaders through such accusations ex-post to frame criminal charges unlawfully against high-ranking Government officials for the purpose of harassment, despite their public services for decades loyal to the respective governments is seen as a sheer act of dishonesty and irresponsibility.

It is noted here that the President on 16 June 2020 also alleged publicly the high-ranking officials including the present Governor as the Senior Deputy Governor of the Central Bank at that time at a meeting for not implementing suitable monetary policies to help the Government fight the global pandemic as done by central banks in other countries. Therefore, the Central Bank announced several major policies on the following day itself. It was later revealed that his resistance was attributable to the policy delay accused by the President. 

Later, he being the then Senior Deputy Governor led a social media campaign that the President’s accusation was a result of him being misled by some people, despite the fact that the Central Bank had implemented a number of policies. Subsequently, the Central Bank published a list of such pandemic related policy actions in its website. However, consequent to this matter, it happened for him to retire a few months before the due date. 

Therefore, it is surprised that same President invited same person for appointment to the post of the Governor and gave even the national security for him to travel from the airport to the Presidential Secretariat.

13. Proposal for an export economy without any monetary policy support plan

The Governor at a recent meeting with entrepreneurs stated that the present Sri Lankan economic crisis is a result of a long-standing import economy funded by debt and, therefore, the solution requires the transition to an export economy. However, this is not a new talk and, in fact, the Prime Minister also expressed this view a few days before based on his earlier work undertaken to promote the export sector of the economy. 

However, being the Central Bank Governor who has enough policy scope to promote an export economy, he has not announced any policy framework or market guidance in this regard so far. Therefore, he has just acted to confirm the view of the Prime Minister.

14. Accusation by the Governor that a key reason for the present economic crisis is the heavy dependence on Sovereign Bonds and unproductive utilization of funds by the Governments

It is noted here that he is also highly responsible for it as he also actively participated in decision-making on all 14 Sovereign Bond amounting to US$ 17,550 mn issued since 2007. Although the purpose of issuance of Sovereign Bonds was stated in prospectus as development funding, the actual purpose was to source funding to the foreign reserve of the Central Bank. Therefore, it is the Central Bank which initiated and handled Sovereign Bond issuances where no surveillance or follow up or any assessment on the utilization of Bond proceeds was taken up by the Central Bank as the Fiscal Agent and Manager of Public Debt.

With regard to 10 Bond issuances amounting to US$ 14,550 mn since 2012, he in the capacity of the Deputy Governor handled all decision-making including the marketing events by sitting with the Governors. Further, he made all important decisions including the amount and the rates on 6 Bond issuances amounting to US$ 12,050 during the period 2015-2019 where the Governors were largely the rubber stamps.

Therefore, it is surprised that he with that international caliber of economics could not foresee the systemic risks of habitual Bond issuances made without ensuring the productive utilization of funds as he now accuses. In addition, the arrangement of foreign currency swaps of billions of US Dollars to replenish the Central Bank’s foreign reserve for numerical targets not accorded to the macroeconomic strength of the country was also operated under his direct supervision.

Therefore, given his leading role in monetary and exchange policies of the Central Bank more than a decade, he is directly accountable for the current economic crisis as it has been primarily caused by the acute shortage of the Central Bank’s foreign reserve and unsustainable control of the exchange rate in violation of both  MLA provisions and basic economic principles.

15. Social media accusation on an attempt to remove the Governor as he has led evidence actively against Treasury bond issuances under investigation

As there is ongoing court proceeding on this subject, it is unlawful to spread such opinions. The relevant investigations also reveal his direct association with bond issuances although he appeared before the Bond Commission as an expert witness. Such information is not revealed here to respect the relevant court proceedings. Those who are interested in this subject may refer to the Bond Commission Report publicly available.

16. Making irresponsible statements at the BBC interview held on June 17

Under the subject of the Central Bank independence taken up by the BBC interviewer, the Governor stated that he awaited to serve the full term of 6 years beginning July 1 and he would not have accepted the Governor post if he were to serve two months and leave. Therefore, it appears that he has arranged this interview with the intension of preserving the reappointment by drawing concerns over Central Bank independence in the international context. The BBC is a good conduit for this intension.

As such, the Government will be in a difficult position to justify the discontinuation of the service of the present Governor in two and half months and, therefore, he expects that the Government would tend to reappoint him for the new term to uphold the Central Bank independence.

However, the MLA and the Exter Report do not recognize the Central Bank independence and accept the authority of the Government to appoint a Monetary Board which can co-operate and coordinate with the Government policies as the Central Bank also is an important public institution. Further, the notion of the Central Bank independence recognized in highly market-based developed countries is not followed in developing countries.

Further, although he stated that he did not come to leave in two months, on May 11 he threatened to step down from the post of the Governor unless the political stability was restored in two weeks. Therefore, his two months story is contradictory.

His statement made at the BBC interview that this crisis could not be solved in two months is not worth telling so publicly, but the fact that he has not laid down a firm monetary policy base for the resolution of the crisis in terms of the relevant statutes including the MLA is in the common knowledge.

Therefore, the President and Finance Minister have the opportunity to use the evidence presented in this article to establish that the present Governor is not a fit and proper person for reappointment for the new term of 6 years.

17. Disclosure of individual bidding information of primary dealers in respect of certain auctions of Treasury bills and bonds in violation of the provisions of the MLA

It appears that the Central Bank has done this first time with the intension of accusing the primary dealers in public in the case of auctions from which the Central Bank is not able to raise funds at yield rates preferred by it as reasonable. The reasons for the increase in bid yields in the market at present are the historic increase in the policy interest rates by 7% announced on April 8, acute shortage of funds due to tightening of the financial conditions by mopping up of the market liquidity and galloping inflation.

This is well established by a recent statement made by the Prime Minister that unloading of an oil ship was delayed due to the difficulty in finding Rupees even though dollar funding was arranged.

As the market participants have the right to speculate in response to prevailing and expected market conditions, such disclosure of individual bidding information is a violation of market principles as well. Further, such disclosure also has the potential of leading to various insider dealings in the market.

18. Attempt of the Central Bank to mop up the liquidity, despite the shortage of liquidity in the economy

This is seen from auctions announced on June 16, 20 and 24 for the outright sale of Treasury bills held in the Central Bank portfolio to mop up Rs. 65 bn. However, due to the acute shortage of liquidity in the market, only Rs. 3.3 bn could be mopped up at yield rates of 20.6% to 22% which has caused an undue loss to the Central Bank as the relevant Treasury bills had been purchased at lower yield rates at the time of issuance. In fact, a sale auction announced on June 24 for Rs. 15 bn has failed due to non-availability of bids.

Further, the inter-bank market volume has significantly gone down due to the shortage of the liquidity and the Central Bank on daily basis prints nearly Rs. 700-750 bn to lend funds to banks at the standing lending facility window.

Therefore, the rationale of such mopping up of liquidity at a time when the Government, banks and private sector confront an acute shortage of liquidity, despite the continuous money printing by the Central Bank, is questionable.

19. The IMF loan programme being dragged on with varying time targets

The present Governor managed to secure his dreamed post by convincing the President that has had the international links to obtain an IMF loan under Rapid Financing Instrument and to stabilize the economy at a time when everybody had started complaining on economic crisis partly as the failure of the Government to secure an IMF loan in early 2020. 

However, after getting appointed, he could only update his record on attending IMF World Bank Spring Meetings in April 18-24 as his request for Rapid Financing Instrument facility was not accepted by the IMF while debt restructuring condition to establish debt sustainability was imposed for consideration of a standard loan facility.

From time to time he has been giving early time targets such as three months for receiving the IMF loan. However, at the above-mentioned BBC interview, he declined to give a specific time frame for securing the loan and stated that the time frame would depend on bilateral talks whereas the progress in debt restructuring is necessary to seek the IMF Executive Board approval although staff level agreement could be reached early. Further, other Sri Lankan authorities have given different time targets whereas the IMF spokesmen have not yet indicated whether Sri Lanka would even receive an IMF facility.

As such, the IMF loan not received at this critical time may not be of significant help to resolve the foreign currency crisis if it is received after protracted delay. Although Sri Lanka has received 16 IMF programmes since 1965 with similar conditions for improvement of macroeconomic balance to prevent future BOP crises, the current crisis proves beyond doubts that Sri Lanka has not sustained any such long-term benefits of IMF programmes as envisaged. It is noted with concern that the present Governor was involved in the supervision of the implementation of the two largest IMF programmes amounting to SDR 2,724.4 received in 2009 and 2016.

However, at the above-mentioned BBC interview he stated that the country would not have confronted such a difficult crisis if an IMF loan programme had been secured earlier with a debt restructuring programme. This seems to be a political type of allegation. As the management of the exchange rate and foreign reserve of the Central Bank for about a decade has been under his direct supervision, he also would know that, given the huge foreign currency risk underlying the economy, an IMF loan around US$ 1-2 bn would not be capable of stabilizing the economy from the crisis primarily originated from global supply chain disruptions consequent to the Corona pandemic. He also commented at a recent meeting that, as done in 16 occasions in the past, the economy could be stabilized by securing an IMF loan at this time too, but that would not be sustainable.

Accordingly, he himself casts doubts on the effectiveness of the expected IMF loan and, therefore, further marketing of his IMF loan dream is not acceptable for securing a new term of the office by the present Governor.

20. On May 28, attending an uninvited meeting with the President together with a Monetary Board member to apprise the President of his performance

The President’s media notice issued on same day states as follows.

• The Governor has apprised the President that he had been able to control the economic crisis in a short period and turned it to a favouable side.

• The programme he has been carrying out with the assistance of the professionals of the Economic field through discussions with the financial institutions including the IMF and World Bank has achieved good progress.

• Further, he has apprised the President of the policy framework adopted by him to control the inflation and strengthen the economy.

However, the facts prove that his meeting has mislead the President as the crisis has got worsened with a further rise in inflation and oil and gas ques leading to a further collapse of the economy, mainly consequent to his unjustified policy actions such as interest rates hike by 7%, default of foreign debt and fictitious exchange rate guidance, while the liquid foreign currency reserve of the Central Bank and the banking system has diminished a level close to zero and foreign remittances have further declined. 

While discussions with the financial institutions mentioned above are taken up not by him but by the Government, his claim that he works with the industry professionals not named is not appropriate as he has to work with the relevant officials of the Central Bank. As the IMF loan has not been finalized as yet, discussion with the IMF has not got adequate progress. The acute shortage of fuel has led to the closure of state institutions and schools for a number of days.

Although the Presidential media press release indicates the President’s full support for the independence in the continuation of the role of the Central Bank, the MLA does not recognize such independence for the Central Bank. Further, the President has no provisions in the MLA to ensure the success of international operations of the Governor and Monetary Board in which the President has full confidence as indicated in the press release.

Overall, the confidence expressed by the Governor before the President in the success of his present mode of operations to bring back the social and economic stability has no justifiable basis in terms of the evidence placed above. Therefore, it appears from the technical words used in the press release that the press release has been drafted with the assistance of the Governor.

How urgent is the appointment?

The social media highlights the need for urgent action to reappoint the present Governor to ensure that the Governor will be in office on July 1. However, all four instances from January 8, 2015, show that the respective Governors have assumed duties after several days or weeks from the date of the vacancy where the Central Bank has operated smoothly. In fact, the Central Bank operations at present are much simpler confining to print money for lending to the Government and banks on a daily basis as it has no operations on foreign reserve and exchange rate management. As such, any urgency or rush to make the appointment before June 30 is not warranted.

What is most important at this critical stage is to find a fit and proper person competent beyond any doubt to serve the statutory term of 6 years in office in order to ensure the policy continuity and management stability of the Central Bank, given the present status of policy failure, distress and instability of the Central Bank.

It is reminded of the media news regarding an unlawful and political attempt of the then President to appoint the present Governor, then Deputy Governor, towards the end of June 2016 for a six-year term and the informal intervention of the then Prime Minister, i.e., the present Prime Minister, that averted the President’s attempt due to disqualifications at that time. 

Therefore, it will be a historic national catastrophe if circumstances now prevail that same Prime Minister happens to recommend same person for the post of the Governor, despite additional disqualifications enumerated in this article. During his long tenure of service in the Central Bank until the end of 2020, I am not aware of any innovative policy actions he introduced to serve the public, other than passing files to the satisfaction of the line staff and the hierarchy, that can be considered for his reappointment at this time.

As the present economic crisis is the result of the acute failure of the Central Bank to maintain its foreign currency reserve and the stability of the exchange rate of the rupee in compliance with the provisions of the MLA, it is the historic public duty of the present President and Finance Minister to ensure that the person appointed as the Governor at this economic crisis time is a fit and proper person beyond any doubts to revive the economy towards the sustainable stability. 

Otherwise, the new Governor could well be the cause for the failure of the present Government as well as future Governments by destabilizing the economy and living standards of the general public as the removal of the Governor would not be an easy task in the event the new Governor is a person sick with the old monetarism and Central Bank independence.

Therefore, any consideration of other types of rhetoric based on social media or personal feelings regarding the prospective candidates is both unlawful but unpublic.

 (This article is released in the interest of participating in the professional dialogue to find out solutions to enormous economic difficulties presently confronted by the general public consequent to the global Corona pandemic and subsequent disruptions and shocks.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books)