Meaningless global rating on the CB Governor: A- rating (21st out of 101 Governors) by Global Finance Magazine. Let us examine facts.

 

This short article is to provide quick comments of economic sense on the CB's X message on the recently awarded global ranking to the incumbent CB Governor.

The X message released by the CB to elaborate the significance and applicability of the captioned rating is presented below.

As many know the true condition and affair behind this rating story, I only wish to provide quick comments on the criteria for the rating indicated by the CB in its X message.

Ranking criteria as stated in the CB's X message

• Inflation has returned to desired mid-single digit levels in recent months from historic high levels recorded in 2022.

• Interest rates are being normalized.

• Volatility in the exchange rate has been curtailed.

• The economy is set to record positive growth from the latter part of 2023.

I provide quick comments below to establish that all four items in the stated criteria are null and void and meaningless.

1. Inflation returned to mid-single digit level

Following comments establish that this is a baseless item in the criteria to rank the CB Governor. 

• Inflation referred to in the X message seems to be the annual change (YoY) in the consumer price index (CPI) which measures the cost of living of the average household sector. However, there is no research findings to establish that central banks can control such consumer prices or CPIs. The CB itself states that "moderation in headline inflation was mainly driven by the softening of energy and food inflation, along with the favourable statistical base effect" (2023 August policy statement). Therefore, the CB has no policy instruments to control such prices and CPI statistical base effect.

• The reference period used in the ranking covers two CPIs, i.e., 2013 based CPI up to January 2023 and 2021 based CPI from January 2023 onwards. Therefore, CPI inflation rates between 2022 and 2023 are not comparable.

• The CPI inflation confronted by the public during the crisis-hit-period from the end of 2019 to August 2023 is around 100% and is to keep further rising. Therefore, the annual CPI inflation is only a statistical inflation number that has no bearing on living standards and macroeconomic conditions of the country. The inflation defined in macroeconomic stability concepts for the monetary policy is the increase in the general price level due to mismatches between aggregate demand and aggregate supply over a longer period of time. Therefore, the mid-single digit annual CPI inflation used in the ranking criteria while the general public is really confronting a soaring level of inflation (100% as shown above) due to macroeconomic weaknesses is a wrong measure.

• The CB itself states in its monetary policy statements that the decline in inflation is an outcome of the tight monetary and fiscal policies (2023 July statement - "The ongoing disinflation process is supported by the lagged impact of tight monetary and fiscal policies, the expected softening of energy and food prices and their spillover effects, and possible repricing of goods and services due to exchange rate appreciation, alongside the favourable impact of the statistical base effect."). Further, the general price level and thereby inflation is always an outcome of the market system (goods, services and factors) where the CB Governor has got no any identifiable or established influence. Therefore, all credit of disinflation being passed to the CB Governor is improper and baseless.

2. Interest rates being normalized

This is a silly item used in the ranking criteria due to following comments.

• Interest rates normalization is not a defined policy activity as nobody knows what the level of normal interest rates is. What central banks are really engaged in is to change their interest rates over time, habitually in two cycles, i.e., raising interest rates in the monetary tightening cycle and lowering interest rates in the monetary loosening cycle or other ad-hoc changes in the mid-cycles. Therefore, no central bank indicates what is its normal interest rate for the economy.

• From the end of 2007 to the end of 2021, central bank interest rates in the developed market economies were around zero. It has been zero in Japan during the past three decades. If so, normal interest rates in the developed world should be around zero. Except in Japan, all those central banks have been competitively raising interest rates (now around 4.5% to 5.5%) since early 2022 and nobody complains about interest rates being unnormal.

• Normalization referred to in this criteria is probably the CB cutting its interest rates from 15.5%-16.5% in March 2023 to the present level of 11%-12% (i.e., 4.5% cut) and further downward expected in the period ahead in response to the falling annual CPI inflation. It is not a big deal for the CB like in all central banks to hike its interest rates and to cut them from time to time as it feels by sitting in marbled office rooms and looking at computer screens on the projections and trends of the CPI as it has the money printing monopoly underlying its interest rate setting. As such, monetary policy ritual across the world has been to talk about raising interest rates during several years in the row and to follow the reverse in several years later where no normalization is presnted. Therefore, the rating institutions and supporters can use any levels of interest rates high or low to praise and rate central banks they like because interest rates go with economic stories created in the respective monetary policies.

• However, if the normalization also covers market/bank interest rates, the issue is the inability of central banks to alter the risk-based interest rates structures in credit markets by changing central bank risk-free interest rates. For example, the CB has issued a monetary direction to banks to set maximum interest rates on credit products without any economic rationale. The CB can issue any such orders as it wishes but the CB is not able to influence in the bank credit risk profiles. Therefore, the monetary order itself shows the invalidity of the market-based monetary policy with the CB to normalize or drive interest rates in credit markets across the economy. As such, the concept of the normalization of interest rates as used in the ranking criteria is meaningless.

3. Exchange rate volatility curtailed

This is an unfounded item in the criteria due to following comments.

• Exchange rate regime operating now is the market-based determination operating since  7 March 2023 on the condition of the IMF. Accordingly, the CB intervention in the foreign exchange market to reduce the volatility is unwarrented. Therefore, the curtailed volatility after 7 March 2023 is a matter irrelevant in the criteria.

• The instrument available with the CB to curtail the exchange rate volatility is the foreign currency reserve. However, it is not a secret that the CB does not have a liquid foreign reserve to intervene in the foreign exchange market even if the CB wishes to fix any level of volatility.

• In developed market economies, exchange rate is a market matter in which central banks do not intervene. Therefore, those central banks would have got poor rating on exchange volatility whereas central banks in emerging economies who maintain fixed/controlled exchange rates would have received better ratings.

• The exchange rate volatility curtailed by the present CB Governor since 13 May 2022 to 7 March 2023 is an artificially fixed exchange (so called guidance exchange rate) imposed by a Governor's regulation without a foreign reserve with the CB. In fact, the default of the govt. foreign debt on 12 April 2023 was the CB's default on foreign debt service as it ran out of the liquid foreign reserve to below US$ 50 mn. How the economy got into the present economic crisis and bankruptcy due to this foreign reserve policy failure of the CB is on the record. Therefore, the claim that the CB Governor curtailed the exchange rate volatility is meaningless on macroeconomic and monetary policy grounds.

4. Economy set to record positive growth

This is a macroeconomically baseless item in the criteria due to following comments.

• The CB Governor does not have any divine ability to set a positive growth in the latter part of 2023, given the level of the contraction of the economy reported so far (i.e., negative 7.8 in 2022 and negative 11.5% in Q1 2023 and negative growth from 2019 onwards except positive growth of 3.5% reported in 2021).

• The IMF programme also is based on negative growth of 3% for 2023. Therefore, the use of unrealized or expected outcomes in rating criteria is unacceptable.

• Given significant uncertainties confronted by markets on policy fronts on the default of foreign debt, protracted delay and lagged effects of debt restructuring and non-existing foreign reserve in liquid form earned through sustainable sources, nobody can expect any level of positive growth sufficient to make up for the contraction of the economy already suffered where the CB or the government has not announced any time-bound growth policy agenda.

• The CB does not have supply side policy instruments in its monetary policy as the present concept and model used are the demand side instruments. Therefore, the CB Governor to set a positive growth of the economy in the latter part of 2023 is meaningless.

Overall Comments and Concerns

• It is unethical and unlawful to rank the CB Governor in the above criteria as those items are not the tasks or responsibilities assigned personally to the CB Governor. Those subject areas come under the responsibilities of the Monetary Board and the CB in terms of the provisions of the Monetary Law Act under which both entities operate.

• The stated subject areas also prevail under immense purview of the government policies. The present political stability that has provided a healthy environment for markets to operate is an outcome of the incumbent government during the past year and, therefore, the full credit of whatever favourable macroeconomic outcomes at this stage should go to the government and not to the CB Governor in his personal capacity. In fact, in few weeks after the appointment to the present public post on 7 April 2022, the CB Governor announced his likely resignation due to the country's political crisis evolving.

• Almost all central banks of high ranking are not the central banks actively engaged or known in managing markets and economies of respective countries within the present monetary policy models in the global context or importance.

• The fact that the Governor of the central bank of a country hit by a severe macroeconomic contraction, non-existing foreign currency reserve, default sovereign credit rating, debt restructuring crisis and artificial balance of payment maintained through ad-hoc official funds and default of foreign debt service is getting a high world ranking in personal attributes is a baseless and bizarre paper work.

• In this context, the CB Governor accepting the global ranking as his personal rank could be considered as nothing but an acceptance of a bribe/gift of undue recognition in his personal capacity without any regard to the country' macroeconomic governance system and authorities and, therefore, both the award of the ranking and the acceptance are unlawful in terms of the country governance. In fact, such personal acts of international community has a potential of creating conflicts in the country governance and stability.

• Therefore, it is of grave public concern why the government authorities do not regulate such undue and unlawful acts of high ranking public officials, given their risks and threats to the national front of the country. It is expected that the Monetary Board and Minister of Finance at least declare whether the rating does not compromise their contributions to the macroeconomic management areas covered in the rating criteria or express their consent to resolve any policy governance issues arising as highlighted above. If the CB Governor alone could deliver all these top macroeconomic outcomes, it is cost efficient to dissolve both government and Monetary Board and allow the CB Governor to run the economy as he wishes.

• It is recalled that the CB/the Govt. in the recent past disputed international sovereign credit rating downgrades at times even though the ratings were based on the agreed criteria monitored by the IMF for a long time.

• Overall, it would be nationally beneficial if the government implements a performance/deliverables (rather than just actions and policy measures) rankings for state institutions through the Parliament on publicly disclosed  criteria in place of present COPE/COPA blame game so that international rankings will not be able to intervene in the country governance inclusive of areas of human rights, corruption and national security.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

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 12 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)