Asking a wings-clipped Finance Minister to fly is a classic repeat of ‘Dunna Dunugamuwe’

An unorthodox and illogical functional allocation

President Maithripala Sirisena has issued the Extraordinary Gazette Notification dated 7 June 2017 allocating functions among the newly sworn-in Ministers a week ago. In this notification too, the Central Bank and state banks have not been returned to their legitimate home, the Ministry of Finance. Hence, the Central Bank will continue to be under the Ministry of Economic Affairs and the state banks under the Ministry of State Enterprise Development.

This had been a temporary arrangement made during the First 100 Day Development Initiative undertaken by the new yahapalana government immediately after the Presidential Election in January 2015. But it was continued even after the Parliamentary elections in August 2015 and now even after a new Minister of Finance has been sworn in. 

This functional allocation was unorthodox and illogical. It was unorthodox because it was the first time that they were taken away from the purview of the Ministry of Finance. It was illogical because it violated the principle of categorising similar functions in a single ministerial portfolio. A Government observing that principle helps it to coordinate its interagency and intraagency work effectively, efficiently and smoothly. 

The error was immediately pointed out to the Government

When the Central Bank was taken away from the Ministry of Finance and listed under the Ministry of Policy Planning and Economic Affairs in January 2015, this writer immediately drew the attention of the Government to its folly in an article in this series (available at: http://www.ft.lk/article/384736/Listing-Central-Bank-under-PM--Unworkable-legally-and-operationally-but-a-step-toward-bank-s-independence). 

It was argued in the article under reference that the particular arrangement was unworkable both legally and operationally. The only plus feature of the particular work allocation was that it was a temporary measure limited to the 100-day period and during that period, the Government could introduce legislation to update the functioning of the Central Bank. 

There was no need for drafting a new law for that purpose, it was pointed out in the article. That was because the Central Bank, under its modernisation project, had drafted in 2004 a new Central Banking Law with technical support from IMF. The Government headed by Prime Minister Ranil Wickremesinghe had agreed in principle that such legislation was necessary. But before the Government could do anything in practice, Parliament was dissolved. 

At the General Elections held following the dissolution, a new Government came to power and that Government did not think it necessary to introduce a new central banking law. Thus, the draft law was shelved and it may still be dusting in the archives of the Central Bank. 

The Yahapalana Government could have picked it up from its dusting place, updated it to reflect the current trends and enacted it in Parliament. But this did not happen. Instead, the Government dragged its feet on all economic reforms, including the reform of the Central Bank.

Ministry of Finance is the owner of state banks

The Ministry of Finance holds ownership over state banks since it is the Treasury which has capitalised them. Hence, it is the Minister of Finance who should appoint their directors and exercise control over them. But when they are listed under another ministry, the Minister of Finance loses control over them. Yet, Minister of Finance is held accountable if they do not perform well or become insolvent. It is a peculiar situation where the Minister of Finance is required to take responsibility without powers.

The danger in such an arrangement is that the Minister of Finance who has no responsibility for state banks resorting to scrape the bottom of the bowl to fill his coffers. This was exactly what had happened in 2016 when the Finance Ministry, through a directive, got state banks to transfer almost all of their profits to the Treasury. It has impeded the internal capital building of state banks prompting rating agencies to take a serious note of the capital distress in Sri Lankan banks.

Rationale of returning Central Bank to Ministry of Finance

Why should the Central Bank be listed under the Ministry of Finance? There are many reasons for that. In the article under reference, the following points were highlighted by this writer for the attention of the Government. But it was to no avail since even after the General Elections in August 2015, both the Central Bank and state banks continued to be listed away from the Ministry of Finance.

Macroeconomic management requires close coordination among key policies  

Macroeconomic management involves the management of three key policies, namely, the monetary policy, fiscal policy and exchange rate policy, in order to facilitate the optimum economic growth for a country. 

Of these policies, monetary policy is a prerogative of the Central Bank, fiscal policy, the Ministry of Finance and exchange rate policy, both the Central Bank and the Ministry of Finance.

These three policies are interrelated and interdependent. As a result, the Central Bank cannot attain the objectives of its monetary policy if the fiscal policy pursued by the Ministry of Finance does not fall in line. For instance, assume that the Central Bank seeks to attain an inflation free world by tightening its monetary policy. The bank is required to increase interest rates and cut money supply by restricting credit levels. 

The objective is to maintain the total demand in the economy, also known as aggregate demand, at a level equal to total supply known as aggregate supply. But if the Ministry of Finance follows an expansionary fiscal policy, then, the aggregate demand will increase defeating the objective of the tight monetary policy pursued by the Central Bank. With increased aggregate demand over aggregate supply, the economy will get overheated making price stability a difficult goal and causing a consequential fall in the exchange rate.

Hence, both the Ministry of Finance and the Central Bank will have to work very closely if they want to do proper macroeconomic management. To facilitate this close working arrangement, the Monetary Law Act has provided for the Secretary to the Ministry of Finance to sit on the Monetary Board functioning as a conduit for such cooperation. 

Hence, the umbilical cord connecting the Central Bank with the Ministry of Finance cannot be severed by a mere delisting of the bank from the ministry. 

Minister of Finance, a protective barrier

From a legal standpoint, it is the Minister of Finance who has been mentioned by name in all the legislations relevant to the Central Bank. Thus, the Central Bank’s relationship with the Government is through the Minister of Finance though it has not been explicitly spelt out in the Monetary law Act. 

But, in many recent central banking legislations such as those found in Bhutan or Nepal it has been explicitly provided for that the Government should communicate with the Central Bank only through the Minister of Finance. In the inverse, the Central Bank too cannot directly communicate with the Government and it has to do so through the Minister of Finance. Hence, the Minister of Finance is the protective barrier between thither government agencies and a central bank. Such an arrangement is necessary to assure its independence and thereby help it to attain its goals.

The Monetary Law Act which is the legislation governing the Central Bank has stipulated the role of the Minister of Finance in relation to the Bank. 

Minister’s role in key appointments to the Central Bank

Section 12 stipulates that the Governor is appointed by the President on the recommendation of the Minister of Finance. The three private members are appointed to the Monetary Board by the President again on the recommendation of the Minister of Finance in terms of Section 8(2)(c). 

The salary of the Governor is also fixed by the President on the Finance Minister’s recommendation as per Sections 12(3). 

Under Section 14(2), the allowances payable to the other Board members are directly fixed by the Minister in consultation with the President. The concurrence of the Minister is needed for the Monetary Board to appoint Deputy Governors to the Bank, as per Section 22. 

Minister’s concurrence is also needed for the Monetary Board to release a Deputy Governor to serve in the government or as a director of a bank according to Section 23(3). 

The Minister also has powers to recommend the removal of the Governor or private Monetary Board members (Section 16) to the President under circumstances stipulated in the section under reference. 

Similarly, the concurrence of the Minister is needed for the Monetary Board to remove a Deputy Governor under Section 23(2).

CB’s reports to the Minister 

There are a number of reports which the Central Bank has to submit to the Minister of Finance in terms of the Monetary Law Act: Annual Report of the Bank (Section 35(1)); a special confidential report whenever there are abnormal changes in the money supply or price level or economic disturbances threatening the monetary stability (Section 64(1)); continuation of the submission of those reports until the country is free from such threats (Section 64(3)); a special confidential report whenever there is a serious decline in international reserves (Section 68(1); a special confidential report before 15 September of every year to enable the Minister to prepare the annual budget (Section 116). 

Currencies are Finance Minister’s prerogatives

The currency issue is a joint exercise done by both the Minister of Finance and the Central Bank under the Monetary Law Act. 

Every currency note issued by the Central Bank shall have the signature of the Minister of Finance in facsimile (Section 53(2)). The Minister’s approval is needed for the Central Bank to prescribe the denominations, dimensions, designs, inscriptions and other characteristics of currency notes (Section 53(1)). 

A similar approval of the Minister is needed for the coins to be issued by the Central Bank in respect of metals, fineness, weight, size, designs, denominations and other characteristics (Section 53(3)). 

A new Section 52A has been introduced to the Monetary Law Act in 1998 requiring the Minister to approve of the issue of commemorative notes and coins. Section 39(c) stipulates that if the Monetary Board decides to transfer a part of its profits to the Government, the manner in which it should be done should be decided in consultation with the Minister. 

The Minister of Finance cannot issue directives to the Central Bank as in the case of other public sector institutions. Yet, in terms of Section 116(2), if there is a difference of opinion between the Minister and the Monetary Board about the appropriate policy to be taken, the Minister can direct the Board to adopt the policy he prescribes by taking responsibility for the consequences of such direction.

Finance Minister’s powers are inalienable

This list is not exhaustive and does not cover the powers, duties and obligations of the Minister of Finance under other legislations such as the Exchange Control Act or the Banking 

Act. 

However, they are all inalienable and therefore, the Minister is responsible to Parliament and to the nation for them. It may be an awkward position for the Minister of Finance to be responsible for work for which he has no role to play. Hence, listing the Central Bank under the Ministry of Economic Affairs is not workable under the prevailing legal structure. It will get into serious trouble in the event of a recalcitrant person occupying the portfolio of finance. 

A Governor walking on a tightrope   

Human nature is such that when people are forced to have divided loyalty, they cannot serve either party well. This may be the biggest challenge to be faced by the Governor of the Central Bank in the period to come. His role will be similar to that of an acrobat walking on a tightrope balancing carefully every step he makes forward. Any imbalance will mean that he will fall off the rope thereby having to deviate from the goals which he is pursuing to attain in the Central Bank. 

However, it may not be an issue if, as Exter expected, people in high places are with maturity, experience and wisdom. But, if these qualities are not present in them, it will invariably lead to conflicts and most of their professional time will have to be spent for resolving them. 

To avoid such a situation, it is necessary that all those in high places should work in appreciation of each other toward the final goal of making the Central Bank a more responsible institution forgetting their personal differences.

Returning the Central Bank and the state banks to Finance Ministry a must

It was a mistake made by the Government to take the Central Bank and state banks away from the Ministry of Finance. It has led to conflicts, practical difficulties and legal issues. Without the Central Bank and state banks within the Ministry of Finance, the new Finance Minister Mangala Samaraweera is like a bird whose wings have been clipped. Obviously, such a bird cannot fly, though the President had wanted that bird to make a quick upward flight lifting the economy also along with him.

The appointment of a new Finance Minister was the last chance which the Government had had to rectify its earlier mistake. But that chance has not been used by the Government. The new Finance Minister and his State Minister are expected to take the slowing economy back to its long-term growth path within the next two years. Without powers, those posts are simply bloated glories with perks and official privileges. The country today needs concerted action and not glorious positions. Since the Government has failed to use this last chance wisely, the economic ship will continue to drift in the high seas without direction.

A reminder of ‘Dunna Dunugamuwe’

The present work allocation is a classic example of the non-working situation depicted in the Sinhala folk rhyme – Dunna Dunugamuwe – taught to school children in their primary classes. It says that the factors that help shoot the deer are in three different places far apart from each other: The bow is in Dunugamuwe, arrows are in Kithalagamuwe, the archer is in Negombo and the deer is sounding its presence in Sabaragamuwe.  

Does it mean that those who have made the work allocation in question have forgotten the moral of this poem which they would have learned in their primary classes? 

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected]).