Why Stakeholder Engagement in the CBSL now? Are the Governor and Monetary Board fit and proper?

The Central Bank yesterday (12^th August) announced a new element to its policymaking framework by employing a Stakeholder Engagement Committee (SEC) of 18 persons considered as key stakeholders of the economy. The TOR of the SEC has been stated as follows.

This article is released to question the public accountability of the SEC based on several governance issues including the SEC being the successor to the two consultative committees on monetary policy and financial system stability which are the core duties and responsibilities of the CBSL under the Monetary Law Act (MLA) and several other statutes.

The TOR of the SEC

The CBSL press release states as follows.

“The primary role of this high-level consultative Committee is to represent the views and sentiments of the private sector and academia on economic conditions and the outlook, considering the overall economic development, particularly in the monetary and financial sectors of the economy. Further, the SEC is expected to provide feedback from the viewpoint of the stakeholders of the economy on the policy measures adopted by the CBSL, thus enabling the CBSL to make informed policy decisions in a more consultative manner.”

Responsibilities of the two consultative committees and governance issues

It is no secret that the CBSL has failed in both responsibilities, monetary policy and financial stability, when the current triple crises, i.e., debt, financial and economic, confronted by all stakeholders of the economy are considered whereas the two consultative committees were in consultative service for the Monetary Board and senior management of the CBSL during the last decade except for a brief period of 2015 and first half of 2016.

They were provided with a professional fee and secretariat facilities including economic information from the CBSL at a cost to the public. However, as nothing was transparent on governance and performance of their services, this is the time to question their responsibilities held in facilitating the statutory mandate of the CBSL and Monetary Board as the delivery of the mandate has utterly failed. A concern remains whether these consultative committees agreed with the decisions on the present level of monetary policy tightening and default of debt.

It is noted that some members of the SEC are reappointed from the two consultative committees that were discontinued without communicating the reasons. However, the discontinuation does not immune those members from their statutory responsibilities assigned by the Monetary Board. Meanwhile, members not selected to the SEC may be subject to concerns over their fitness and propriety in their professional fields.

Why does the Governor need professional inputs from the stakeholders through the SEC to perform his duties?

The Governor assumed the rein of the CBSL as a professional of international caliber to recover the country from the economic crisis. It is generally known that the CBSL employs highly qualified and internationally trained professionals in the fields of economics, banking and finance. The Monetary Board also consists of the Secretary to the MOF and three professionals representing the private sector.

In that background, the Governor immediately after his appointment implemented several landmark and brave policies with the aim to resolve the current crisis. Those are the historic interest rate hike by 8% to control the soaring inflation, the appeal to international community to make foreign currency donations to the CBSL in order to build its foreign reserve to be used for essential imports, the default of government foreign currency debt and fixing back the exchange rate without a supporting foreign reserve. 

However, these policy actions have boomeranged on the country to further slip down towards the bottom of the crisis with inflation expected further rising to 70%, growth in negative territory and bowing to donor countries to get essential imports where a historic political crisis including the expel of the President with two and half years of the term to complete.

Therefore, the Governor may be under impression that it is prudent to seek the engagement of the key stakeholders of the economy as the policy expertise of the professional Monetary Board members including himself and CBSL staff is not up to the standard to resolve the economic crisis so that he does not face risks in staying at the post for the full term of the 6 years as he claims.

Governance issues relating to the SEC

I wish to raise following concerns.

• First, the SEC is the abbreviation used worldwide formally and publicly for the Securities and Exchange Commission, a very powerful financial market watchdog. Therefore, it will not be professional and lawful for the members of the CBSL’s SEC to state that they are the members of the SEC. I hope that the real SEC would post its protest for this abbreviation.

• Second, public (households, businesses and individuals) and government are the stakeholders of the economy and they have given clear statutory mandates and powers to the CBSL to serve the stakeholders independently within such mandates and powers. Therefore, why the CBSL needs such a stakeholder engagement now after 72 years of operations is questionable.

• Third, as the press release states that the SEC members are the key stakeholders of the economy, the CBSL should justify how those members have become the key out of all stakeholders of the economy other than being some members of the public. Therefore, the selection criteria and procedure adopted must be disclosed as public resources and mandates are involved in these members outside the mandates already given to the CBSL. One also can raise a query as to why the CBSL did not consider getting some members from the social protestor groups hoisted for a system change where the Government also has recognized the need for consultation with them on a regular basis.

• Fourth, these members seem having serious conflict of interest, given their access to internal information and links to the staff in the CBSL which are essential to perform their high-level policy advisory duties to enable the CBSL to resolve the present crisis. Some members are seen having direct exposures to banking and dealing businesses regulated by the CBSL that could be immensely benefitted from this access to the CBSL. The investigating evidence is available that such insider dealing networks were available in the CBSL on trades of government securities due to non-availability of ethics and governance principles even at the level of the Monetary Board. Recently, the Bank of England banned all types of market discussions and consultations by the BOE staff due to concerns over leakage of market sensitive inside information.

• Fifth, whether the public accountability of the SEC members is formally established within the provisions of the MLA is not known. As they are to represent all stakeholders of the economy and their advisory services have a key bearing on the mandates of the CBSL, they are also responsible for the recovery of the economy from the current crisis that has been caused by the CBSL itself by failing to implement the monetary policy including the foreign reserve and exchange rate management as required in the MLA. This responsibility is depicted by the primary role of the SEC as stated in the CBSL press release although any other subsidiary roles possible are not disclosed. Therefore, advisory services obtained formally for the CBSL functions cannot be exonerated from the public accountability in the event the CBSL further fails in its duties. In such situations, the CBSL technical staff may finger at the members of the SEC as well just like they do it for the past Governors and Monetary Board members.

• Sixth, the public accountability requires the processes, reporting lines and audit of the SEC operations. It is not disclosed whether the SEC reports to the Governor or Monetary Board or internal committees such as Monetary Policy Committee and Financial Stability Committee, the frequency of meetings and minutes and how the secrecy of information stipulated in the MLA is ensured. Information secrecy problem arises when the CBSL staff makes a technical (magical) presentation at the meeting of the SEC (as seen in the picture) and deliberate on the member views and consultation while some sleeping as happened in the previous two committees. Therefore, it is necessary to ensure that specific internal controls and performances of the SEC be recorded, otherwise, all policy decisions and actions taking place in the CBSL will be listed as those of the SEC.

• Seventh, whether the SEC members have the required exposure and expertise in specified fields to deliver the primary role set out in the CBSL press release is a concern. The stakeholders of the economy cannot understand it from the list of names and designations given in the press release. I recall one event of a team of professors meeting in March 2016 with the President along with the Prime Minister, Minister of Finance and Central Bank Governor with the intension of forming a committee to provide economic advice on a going basis. In the middle of the discussion, as some professors tended to question on the government securities yield rates decided by the Tender Boards, I inquired from them on the data base and research work that they have had to provide such economic advice. One professor immediately responded that they did not have that kind of ability. As everybody looked at each other, the President strategically postponed the meeting with a promise to meet again which never happened.

Overall Concerns

Like in other external consultations and media interactions by the CBSL Governor, this committee also has the potential of being used as a networking conduit to create an artificial image of the Governor as being good as other stakeholders of the economy including political leaders lack the technical knowledge to assess the performance of the CBSL mandates and policy actions. For example, present exorbitantly high interest rates policy of the Governor is very popular among the depositors as they receive high interest income after several decades.

However, they do not understand how such high interest rates cause immense risks to safety of their deposits as deposit money lent out by banks and finance companies at further high interest rates runs the risk of being default. For example, money lent to the government these days carries interest rates close to 30% where the government debt runs huge risks on the ability to repay.

My personal experience is that the members of such external committees are selected from close friends of the Governor and Monetary Board members, and they are brought to facilitate image building in the society. On the other hand, these persons happily accept the assignment as it paves the way to the CBSL for their personal agendas such as getting information updated and regulatory approvals expedited while they use the assignment to improve their professional exposures and business cards. However, they do not have any sense on public responsibilities assigned to them in the event of litigation on economic policies.

Therefore, the Minister of Finance who is the supervisory authority on the CBSL and Monetary Board should be cautious of such private kingdoms created by the Governor/Monetary Board on the state-owned money printing press for which the Minister is finally responsible for. Such committees may often pose difficulties for the Minister to intervene in CBSL policy decisions as provided for in the MLA because such committees in the hindsight tend to pretend good governance and democracy prevailing in the CBSL where the political media will take the intervention to the front with the corruption charges.

In general, the creation of such personally motivated devices in the CBSL violates both MLA and public institutional governance as highlighted above. Therefore, this provides for the ground for questioning the fitness and propriety of the Governor and Monetary Board members for continuation of their public assignments.

However, given a large number of violations and irregularities already found from the CBSL, this also will go unattended in the current state of the country governance in disarray.

The stakeholders of the economy have given wide public powers with mandates to maintain economic and price stability and financial stability to the CBSL. However, the CBSL has miserably failed in keeping the mandates as the stakeholders now confront a historic triple crises. Therefore, this act of the CBSL to engage with 18 persons as key stakeholders of the economy is nothing but an attempt to mislead the stakeholders to cover up its accountability for the crisis.

 (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 and a large number of articles published)