Is CB Governor aware of how market forces behave? Let us examine.
The Central Bank Governor is having a continuous media campaign to blame the political system and markets for the current economic crisis as if he is innocent and white clothed party who has come to save the public from the crisis. He pretends that he is the only internationally qualified professional economist who has the magical power to resolve the crisis in a few months, but the political instability and errant market players make it difficult for him to do it.
However, he hides his long carrier in the Central Bank nearly 30 years up to the end of 2020 in the national policy fields such as monetary policy and foreign exchange market regulations inclusive of the foreign currency reserve and exchange rate management that have caused the present historically catastrophic crisis. His media campaign covers media interviews and press releases.
The last press release issued on 29th July on
the title “Importance of ‘fair play’ by all stakeholders of the economy
in countering the current unprecedented economic crisis” shows his malicious
intension to cover up his responsibility and inability by attempting to mislead the public. Some
of the contents in this press release are commented as follows.
Content 1
One major factor that is contributing to the current crisis
and the resultant hardships is the lack of foreign exchange liquidity
in the banking system.
My Comment
Both foreign exchange and banking system are under the
direct regulation and supervision of the Central Bank under various statutes led
by the Monetary Law Act (MLA). In fact, the immediate cause of the current
crisis is the acute shortage of the foreign currency in the country to provide
for imports and other foreign payments. Under the MLA, it is the duty of the
Central Bank to maintain a foreign reserve adequate to meet the BOP deficits in
the foreseeable future and, the Central Bank is empowered with many regulatory
powers in this regard.
In addition, only banks are authorized to deal in foreign
currency in a manner to satisfy foreign currency/exchange needs of the economy.
The Central Bank’ foreign reserve is to serve as a buffer to keep an orderly functioning
foreign exchange market in the banking system.
Therefore, the lack of the foreign exchange in the banking system is nothing but the failure of both Central Bank and licensed banks.
However, the Central Bank attempts to blame certain market players such as
importers, exporters and remittance agents for the foreign exchange shortage. Instead,
the Central Bank and licensed banks must do their public duties to ensure that foreign
exchange crisis is resolved without delay.
Content 2
The success of these regulatory measures and the ability to
achieve the intended outcomes depend on the support and cooperation from the
trading community and the banking system. However, it has been brought to the
notice of the CBSL that certain market players are not being
fully compliant with these regulations. Such practice, if continued, would
deprive the people of the support expected from the Government in difficult
times, while undermining the moral obligation of ‘equal burden sharing’ that is
expected of all stakeholders under difficult and extraordinary circumstances.
My Comment
As the Central Bank referees to “certain market players” being not
fully compliant with the regulations, it seems that the Central Bank knows who are them and, therefore, should take regal action against them. Instead, there is no
point of telling it to the public.
The phrase “moral obligation of ‘equal burden sharing’ expected of all stakeholders under difficult and extraordinary circumstances" has no meaning in market environment. According to Adam Smith, father of economics, all market players, i.e., buyers and sellers, compete for self-interest, and it is this self-interest that leads to the most favourable economic outcome or welfare in free markets than that sought n regulated markets.
Therefore, what the Central Bank means by the words “moral obligation of ‘equal burden sharing’ of all shareholders should be defined by the Central Bank itself as it is the regulator of the monetary and foreign exchange markets. In my knowledge of regulation, I am not aware of such a moral obligation of equal burden of sharing of all stakeholders in the market.
In the plain meaning,
regulations stipulate a set of rules laid down for identified market players,
monitoring their compliance and action against violators. Accordingly, regulations
neither interpret any form of moral obligation or equal burden sharing nor impose
such undefined conceptual requirements.
However, regulations are never able to prevent or control the market behaviour of self-interest which will prevail in various forms. The activity of the gray market in response to regulations is a result of the self-interest.
Further, although the title of the press release mentions
about “fair play by all stakeholders of the economy”, the Central Bank does not
describe the meaning of “fair play”. The fair play or fair market should be ensured with specific regulations on the market conduct. However, everybody knows the unfair
suffering of the general public due to this foreign currency crisis being the failure of the Central Bank.
Content 3
All efforts would be taken to strictly monitor and ensure
compliance with all regulations on foreign exchange transactions, including
repatriation requirements of export proceeds, conversions, and mandatory sales
to the CBSL etc. Any instances of non-compliance will be dealt with stern
action within the provisions of all applicable laws.
My Comment
There is no point of telling this to the public. If those are effective regulations with a efficient monitoring mechanism, the Central Bank
should be taking action against non-compliant parties on a regular basis as and
when such non-compliances are detected.
Content 4
It is noteworthy that the CBSL has strengthened its capacity
in relation to monitoring of foreign exchange transactions through the
implementation of the Export Proceeds Monitoring System (EPMS) and the
International Transactions Reporting System (ITRS), which is a comprehensive
monitoring system of cross-border transactions and domestic foreign currency
transactions. These systems facilitate regular monitoring of foreign exchange
inflows and outflows. Further, assistance from independent professional bodies,
including audit firms, is also being sought for the timely identification of
any malpractices.
My Comment
It is shown that EPMS and ITRS are new systems to the credit of the new Governor. The press release dated 21 June also talks about the introduction of ITRS. However, the Central Bank has been receiving daily online reports on foreign currency flows and many other reposts monthly and quarterly through the banking system since 1950.
These reports are intended to provide data and
early warnings so that prompt actions can be implemented by the Central Bank to
correct adverse market developments. It has been done in the past, for example 1999/2000
foreign exchange market instability. However, the Central Bank by sitting on a large
economic data base has failed to forestall the present currency crisis.
Further, present foreign exchange shortage is not a problem of export
proceeds but of many factors. Therefore, EPMS and ITRS are not crisis
resolution instruments. What matters is whether the Central Bank identifies
early warnings from the information already available as in the past and takes corrective policy actions promptly.
The statement that “assistance from independent professional bodies, including audit firms, is also being sought for the timely identification of any malpractices” shows the irresponsibility and inability of the Central Bank to carry out its public duties. The EPMS and ITRS consist of highly confidential and personal information that is reserved only for the use of authorized officers of the Central Bank.
Therefore, giving the access of such market sensitive information to so called independent professional bodies is not only a violation of the secrecy provision of the MLA but also the leakage of such market sensitive information to external parties could cause significant economic disruptions.
Further, it hints that officers of the Central Bank are not competent in reading and understanding of this information as it needs the help of independent professional bodies. Therefore, it is revealed that the Central Bank has failed to forestall the crisis as it did not have a competent staff who could use the information and detect early warnings.
Content 5
The banking community is requested to ensure strict
adherence to all regulations in relation to foreign exchange transactions. The
Central Bank wishes to reiterate that overcoming current economic woes and
distresses requires substantial and concerted efforts from all stakeholders of
the economy. Foul play on the part of any group of stakeholders would
inevitably result in the worsening of the crisis, thereby having widespread
detrimental effects. It is the duty of everybody to act conscientiously and
responsibly, and extend their unhindered support during this hour of need, for
the nation to recover rapidly and emerge stronger from this crisis.
My Comment
Making requests to banks to ensure strict adherence to all regulations has no
point because if regulations are effective banks are required to comply with
and punishments against violations are readily available.
Therefore, above paragraph is intended to cover up the
Central Bank’s inability to resolve the economic crisis by passing the blame to market
participants. Stakeholders of the economy have their own interest and, therefore, they are not compelled to follow economic sermons preached by the Central Bank to unite and act as the Central Bank wishes. The political leaders also are making similar requests to each other to get together to resolve the crisis.
Content 6
The Government and the CBSL remain committed to implementing
much needed reforms to overcome long-standing structural issues in the economy.
The Government and the CBSL are relentlessly pursuing
efforts to secure bridging finance to reduce and alleviate economic stresses in
the near term. A notable progress has been made in the ongoing negotiations for
an economic adjustment programme with the International Monetary Fund. The debt
restructuring process is also underway, capably assisted with the Legal and Financial
Advisers. The Government and the CBSL remain committed to implementing much needed reforms to
overcome long-standing structural issues in the economy.
My Comment
Although the Governor frequently talks about acting
independently, he now talks about policies of the government and the Central Bank together.
If he independent, he must talk about the policies of the Central Bank only. The most part of policy solutions
for the present crisis rests on the Central Bank as the present crisis is a financial
crisis caused by the currency/BOP crisis that falls within the purview of the Central Bank.
However, the present Governor has aggravated the crisis further by raising interest rates since 8 April 2022 so far by 8% and defaulting government foreign debt arbitrarily on 12 April 2022 without seeking the approval of the Parliament under the Constitution. As a result, the economy has got into deep bankruptcy because interest rates have risen to around 30% causing severe problems for the government and private sector to rollover debt while international trust in trade and finance transactions with Sri Lanka has collapsed. Therefore, the country now has to beg for an international bailout.
Therefore, galloping
inflation, acute foreign exchange shortage, excessive currency depreciation and
resulting decline in the real GDP and employment and country-wide disruptions in markets have become ordinary circumstances confronted by the present
economy and general public for which the Central Bank is held responsible.
In this situation, it is now clear that the IMF programme,
foreign debt restructuring and structural reform frequently preached by the
Central Bank Governor as the scapegoat cannot resolve the crisis in six months
as the Governor frequently cites. The IMF programme and reforms are conventional
talks followed in the past 50 years. The last IMF programme ended only in early
2020 just before begining of the crisis. There is no country in the world that could recover from such an economic
crisis with an IMF programme.
Further, it is the work of the government to deal with IMF
programmes. The Central Bank is only the agent to the government. Therefore,
the Central Bank trying to take the ownership of IMF programmes is unwarranted.
My Overall Comment
Therefore, it is proposed that the Central Bank Governor stops
taking loud as if he is the only person who can stabilize the economy while blaming
others for the crisis must present his new policy package to stabilize the
economy in terms of the statutory requirements of the MLA and other relevant
statues. However, he only talks about the monetary policy tightening to control inflation so that the rest of the crisis will be solved by the low inflation. It is common sense that the monetary policy with high interest rates cannot tame the present galloping inflation as it has been the direct result of the currency
crisis and supply chain disruptions.
Therefore, killing the time by talking about the IMF programme to resolve the crisis and blaming others for the crisis while the general public continue to struggle in the
crisis show the inability of the Governor to initiate a package of monetary and financial
policies without further delay.
Since the political stability is now being put in place by the President and political leadership, the
Central Bank now should be able to implement crisis resolution policies. As the
political instability is a direct result of the economic crisis, it is the economic
stability that is required for bringing back the political stability. Therefore, the
Governor without waiting for the political stability as he thinks favourable for the Central Bank must
work now urgently to bring the economic stability which is the statutory duty of the Central Bank under the MLA without any regard to the political stability.
Therefore, he must stop misleading the public by blaming others
for the crisis and fulfil his statutory duties as he claims himself to be the
only independent professional so far in the Central Bank.
As such, the Governor must read basics of how market forces behave and acquire skills accordingly to regulate market forces efficiently for bringing back the stability of the economy if market forces are singularly responsible for the crisis without trying to mislead the public through media.
However, if he attempts with high hands and media talks to punish market participants maliciously and unfairly to cover up his foul play of the Central Bank as the regulator, resulting macroeconomic consequences would no doubt further deepen the crisis to last for decades as the IMF programme and international financial advisors are not divine to rescue the economy and living standards from the crisis as the Governor hopes.
(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
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