How Indian & Malaysian CB Governors resigned to protect independence.
I thought of writing this article no sooner I saw a social media video clip attached here (CB at COPF). It is a part of the CB Governor pleading the permission of the Chairman of the COPF to pay salaries to staff for the month of March at rates agitated by both Parliament and general public. This shows how the CB Governor attempts to clicking on to politics to save his public seat in contravention of central bank governance standards.
Article's Background
In my book "Innovating Central Banks" released in March 2018, the Part II was allocated for "Central Bank Governance: Public Trust and Survival."
Under the Part II, Chapter 6 presented "Issues in Central Bank Governance" from selected countries. This included extraordinary acts of Governors of Reserve Bank of India (RBI) and Bank Negara Malaysia (BNM) to protect the independence by stepping down from respective public seats.
Both emanated from the policy conflict between the central bank and government.
- In the case of RBI, the conflict arose on four policies - policy rates hikes, tightened standards for non-performing loans and resolution of stressed assets, Basel Capital based capital conservation buffer and prompt corrective action system and retained profits of the RBI. On these conflicts, Dr Raghuram Rajan did not apply for the second term in 2016 and the succeeding Governor Dr. Urjit R. Patel stepped down in December 2018 prior to nine months of ending his term.
- In the case of BNM, the conflict arose on a land purchase by the BNM from the government and non-investigation on a suspicious fund transfer received to the bank account of the former Prime Minister. On this conflict, Dr. Tan Sri Muhammad Ibrahim resigned in June 2018 in two years of the term and in less than a month of the election of the new government.
Both cases show how those central bank Governors acted to uphold the independence of the central bank and professionalism of the Governor post in the long term institutinonal interest, unlike the present Governor of the Central Bank of Sri Lanka acting in short term personal interest.
I reproduce below relevant texts as they are I presented in the book for information of those who are further interested in the central bank independence subject.
India
In 2016, Raghuram Rajan did not request for the second term of three years as the Governor of the Reserve Bank of India (RBI), consequent to politically motivated allegations centered around Indian values and domestic economic priorities. He pursued a tight monetary policy to reduce inflation and bank bad debt cleaning up policy to improve the banking sector soundness during his term of three years. Partly on his US-based professional profile and market-based economic values, Indian politicians could not or did not recongnise the value of his professional profile of international recognition for the Indian economy. Therefore, the new government went with the opposition views by appointing Urjit R. Patel, one of the Deputy Governors, to the post of the Governor. This is also an instance of an RBI Governor ending in one term in the recent past.
However, an open policy conflict between the government of India and RBI headed by Patel arose in the third quarter 2018. By this time, RBI has been taking several monetary and bank regulatory policies to tackle systemic economic problems in two areas. First, the RBI raised its policy rates by 0.50% in two instances since June 2018 to tackle the excessive currency depreciation and resulting capital outflows in response to the US interest rates hikes by the US Fed under its monetary tightening since December 2016. Second, tightened standards for non-performing loan recognition and resolution of stressed assets (including medium and small and micro enterprises which was the politically most concerned), implementation of Basel-based capital requirement on last tranche of capital conservation buffer of 0.625% and prompt corrective action (PCA) of banks where concerned banks (with high bad debt and capital inadequacy) inclusive of state-owned banks were barred from loans of the RBI were affecting bank credit operations. With normal tight liquidity in the market due to sudden capital outflow and currency depreciation, these two policies started adversely affecting economy. The government pending the general election in 2019 wished relaxed monetary conditions to promote the economy as part of its populist policies. In addition, the government attempted to take surplus reserves of the RBI (economic capital framework of RBI) to be used for development activities and cost of livings reliefs whereas the RBI declined to transfer such accumulated reserves by citing that the reserve was required for possible emergencies.
As a result, RBI sources as well as media reported on the issue of the policy independence of the RBI where the media also reported of possible step-down of the RBI Governor. In the middle of economic difficulties confronted by the economy, the government communicated that the RBI also needs to be accountable and give priority to economic growth over inflation and financial stability through facilitative credit policies as inflation was very low. On 2 October 2018, the day RBI monetary policy decision was due with high market expectation of another hike in policy interest rates to address concerns on inflation due to excessive currency depreciation and rising world oil prices, the government reduced petroleum prices in order to reduce the cost of living and inflation expectations. As a result, RBI decided to keep the policy interest rates unchanged. In August, the government appointed two new members to the RBI Board while in September the government removed another member who was believed to be close of the RBI officers and appointed a new one so that 9 directly government-connected members of out of 18-member Board can influence the Board decisions. Some analysts expected the government to invoke section 7 of the RBI Act that empowers the government to issue directions to the RBI as it considers necessary for public interest after consultation with the RBI Governor. The media reported the possibility of the RBI Governor to step down in view of the independence of the post.
Hard on heels of tensions of such conflict, the RBI Board met on 19 November 2018 and managed to control tensions as revealed in RBI press release issued same day on the outcome of the Board meeting as follows. “The Reserve Bank of India’s (RBI) Central Board met today in Mumbai and discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corrective Action (PCA) framework and the Economic Capital Framework (ECF) of RBI. The Board decided to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI. The Board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to ₹ 250 million, subject to such conditions as are necessary for ensuring financial stability. The Board, while deciding to retain the CRAR at 9%, agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020. With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of RBI.”
Further, the Monetary Policy Committee of the RBI held on 5 December 2018 decided to keep the policy interest rates unchanged in view of eased currency pressure and foreign investment outflow and reduction in inflation, growth and oil prices. The RBI also had expanded the liquidity injection to the domestic money market by over Indian Rs. 1 trillion in last three months (total in the year Rs. 1.36 trillion) and announced an additional Rs. 400 bn for the month of December where the increased frequency was expected to continue till March 2019. At the monetary policy press conference held on same day, questions were asked about the present relationship of the government with the RBI and any decision on transfer of RBI surplus reserve to the government whereas no response was provided.
However, surprisingly, the RBI Governor Urjit R. Patel stepped down on 10 December 2018 ahead of about nine months to complete his term of three years and issued a short message stating that “On account of personal reasons, I have decided to step down from my current position effective immediately. It has been my privilege and honour to serve in the Reserve Bank of India in various capacities over the years. The support and hard work of RBI staff, officers and management has been the proximate driver of the Bank’s considerable accomplishments in recent years. I take this opportunity to express gratitude to my colleagues and Directors of the RBI Central Board and wish them all the best for the future.”
The media and professionals commented that as speculated the resignation was prompted by the policy conflict between the government and RBI that had arisen since October. The demand for RBI liquidity to the non-banking sector in the wake of currency tensions, prompt corrective action system on banks (prevent loans form the RBI to concerned banks), transfer of surplus reserves of RBI to government and RBI Board becoming operational on the RBI rather than supervisory and advisory with the influence of the government were the bones of recent contentions. The former RBI Governor Raguram Rajan commented that all Indians should be concerned as strength of institutions is important for growth and development. He further commented that the government must take extreme care in how it proceeds further in relationship with the RBI and wiser head should prevail in the current environment and circumstances that led to this resignation have to be reversed.
Indian government after a quick selection process appointed Shri Shaktikanta Das as the Governor on 12 December 2018. The media made diverse comments on his credentials. The moderate media commented that the new Governor, being a long-experienced retired member of Indian civil service, would be a consultative and consensus builder to iron out major differences of opinions, primarily in the interest of the economic growth of the country (Dovish) although he did not have any known qualifications in Economics. Immediately after assuming duties, he commented that the growth was within the mandate of the RBI and convened a meeting with the CEOs of public sector banks next day to discuss burning regulatory issues confronting them. The contrasting approach of the outgoing Governor Patel was a quite rigid one based on own judgments on monetary policy focused for the inflation control (Hawkish) and tight regulation focused for banking soundness and stability which was disliked by the government and banking community due to concerns over difficulties created on businesses that led to conflicts between the government and RBI. A need for a new governance system for the RBI appeared in the media for discussion to ensure the independence of the RBI while maintaining the policy coordination with the government. Accordingly, minutes of the first RBI Central Board meeting chaired by the new Governor on 14 December 2018 revealed that “the Board deliberated on the Governance Framework of the Reserve Bank and it was decided that the matter required further examination.” Unless the new Governor is exceptionally good at consensus-building and close relationship with the government, discussions over the proposed new governance system could cause enormous tensions to the internal operation system of the RBI, given its particular bureaucracy functioning on confidentiality of information and excessive monetary and banking policy powers.
Malaysia
On 6 June 2018, Bank Negara Malaysia Governor Tan Sri Muhammad Ibrahim resigned within less than a month of the election of the new government in response to a political/public allegation on a land purchase deal of the central bank with the previous government in 2017. The land of the extent of 55.79 acres adjoining the central bank had been purchased for RM 2.6 bn without an open tender process for the purpose of establishing a financial education hub by the central bank. The allegation was that purchase was intentionally made at an over-price to use proceeds to pay debts of 1 Malaysia Development Berhard (1MDB) alleged to have been involved in corruption and scandals amounting to a loss around US$ 4.5 bn to the government. The outgoing Governor clarified in a press release his or the central bank’s non-connection to the subject under allegation. Since the land deal was done outside the competitive tender in spite of the central bank’s request to do a competitive tender, a direct intervention by the government in the central bank to sell the land to the central bank may not be ruled out.
Such allegations generally surface in countries immediately after the general elections once the incumbent government loses the power and allegations of corruptions are made against the former government. As the 1MDB was a major subject of misappropriation and scandal of public funds under the previous government, it is natural that all parties who have direct or indirect links to dealings of 1MDB get accused. New Prime Minister Dr. Mahathir Mohamod at an interview with the Bloomberg on 25 June 2018 stated that the central bank did not need the land and its purchase was arranged to provide funds to the government which was not proper. The outgoing Governor stated in a press release that, when he took office in May 2016, he vowed to execute the responsibility of the office of the Governor with the highest level of professionalism, integrity and honour and that, over the past few weeks, there have been serious questions raised if he had fallen short of this standard and put at risk public confidence in the central bank. He further stated that “it is simply unthinkable for us to be associated with such a controversial entity mired with accusations of fraud and mismanagement. It is not in our nature to do such things. We even took enforcement action against them earlier. The 1MDB scandal has cost the country dearly and as a Malaysian myself, I am deeply angered, distressed and outraged.” Accordingly, his prompt resignation showed a high level of integrity expected from high profiled public officials.
The political influence in the Malaysian Central Bank further surfaced by new information that the former Prime Minister Najib Razak (who lost the election on 9 May 2018) had sought the cover from the central bank in respect of an alleged fund transfer of RM 2.6 bn to his personal account in 2003. He communicated to the media on 2 July 2018 that it was a donation from a member of the Saudi royal family and if there had been any doubts of funds, the central bank would have known and informed him. As nothing that sort of happened, he had assumed that everything was fine. In an immediate response, the former central bank Governor Tan Sri Zeti Akthar Aziz responded on 3 July 2018 that she had no knowledge of funds. She further clarified that the former Prime Minister on 3 July 2015 followed by another Cabinet Minister had requested her to issue a statement that he had done nothing wrong in his account whereas she had declined as she did not know about funds. Her clarification also included that no banking institution had reported of any suspicion as per the reporting procedure or no tip-off had been received to suspect the account and, therefore, the central bank did not have a ground to investigate.
However, this reveals a grave lapse of the central bank for not investigating the account as the former Prime Minister himself had originated the concern, although the motive was different, by requesting the former central bank Governor to make a statement. Since both bank supervision and financial intelligence unit were within the central bank being the single regulator, she should have caused an investigation into or a fact-finding report on the matter at least for the curiosity as she was aware of the concerns and she had an extensive surveillance framework. Even though there was no filing of suspicious transaction reports by any banking institutions, the normal reporting of transactions above US$ 10,000 or equivalent of local currency as per international KYC standards would have caught the above account and the financial intelligence unit would have flagged it automatically. Therefore, it is clear that the central bank would have been silent on the subject due to high political connections, as usual in many emerging market economies.
The new government appointed Ms Zeti to the five-member Council of Eminent Persons set-up to advise the new government on economic matters and to the post of Chairman of National Fund Manager Permodalan Nasional Bhd. during same week. She had served as the Governor of the Malaysian central bank for 16 years and stepped down in May 2016 during the tail-end of the tenure of the former Prime Minister. Further, media reports reveled that there had been investigations carried out by the central bank on 1MDB during the tenure of Ms Zeti with the assistance of Ms Nor Shamsiah Mohd Yunus, a Deputy Governor, who left the central bank in 2016 after some time of the appointment of Muhammad Ibrahim as the Governor. Meanwhile, the new government appointed Ms Nor Shamsiah Mohd Yunus to the post of the Governor of the central bank. Therefore, all these events revealed direct political interests surrounding the central bank.
(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. All are personal views of the author based on his research in the subject of Economics which have not intension to personally or maliciously discredit characters of any individuals.)
P Samarasiri
Former Deputy Governor, Central Bank of Sri Lanka
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