‘Cabraalanomics’ as panacea?

With mounting economic challenges such as foreign exchange reserves, debt crisis and upward pressure on inflation, heads are about to roll at the Central Bank of Sri Lanka.

Prof. W.D. Lakshman is expected to step down as Governor of the Central Bank, and political circles are buzzing with speculation that Money and Capital Markets Minister Ajith Nivard Cabraal will soon reclaim the role. The speculation is credible, with Minister Cabraal making regular interventions on economic matters in the country, as he insists money printing will not raise inflation rates and pledges to bring the Rupee to 203 against the Dollar.

Minister Cabraal was one of the first members of the Gotabaya Rajapaksa-led Viyathmaga movement. His previous tenure as Governor of the Central Bank was marked by success as well as controversy.

The Sri Lanka Podujana Peramuna propaganda machinery might have portrayed Yahapalanaya appointee Arjuna Mahendran to be the blackest of Sri Lanka’s Central Bank chiefs, but Minister Cabraal’s record at the helm of the financial regulator had its share of black marks too though he defended some of the actions taken as straightforward. He was instrumental in Sri Lanka investing in Greek bonds shortly before Greece defaulted on its sovereign bonds. The loss to the State from CBSL’s Greek bonds misadventure was estimated at Rs. 2.1 billion. Then there was the infamous crude oil hedging contract that cost Sri Lanka millions of dollars when oil prices crashed in the world market soon after. Cabraal was also linked to the ill-fated Rs. 100 million bid for the 2018 Commonwealth Games to be held in Hambantota. It was during his tenure when millions of dollars paid to US lobbyists through the Central Bank from 2012-2014 to ‘rebuild Sri Lanka’s image’ as action at the UN Human Rights Council in Geneva intensified on wartime atrocities and the 2005-2015 Rajapaksa Government’s reconciliation failures. The payments included $ 6.5 million to a CID mole known as Imaad Zuberi who was recently convicted in a US court on charges of tax evasion, foreign influence peddling and campaign finance violations.  As reported in the Daily FT this week, Cabraal’s impending re-appointment was also questioned on the basis that the Monetary Law Act prohibited an MP or a member of any provincial council or local authority being considered. In that context, a member of a political party, had never been appointed as a Governor of the Central Bank, although N.D.P. Panditharatne served the post long ago as an appointed member despite the fact he was a member of the UNP. Cabraal is a Founder Member of the SLPP.

If and when chosen Cabraal will resign as an MP and then be re-appointed as the Governor; hence questions have been raised with regard to the independence of the Central Bank. Many view Cabraal today as vastly different to who and what he was during his first two terms spanning 2006 to 2015.  His supporters however vouch that during his tenure Cabraal was credited for the overall improvement in macroeconomic fundamentals, beginning the long streak of low single-digit inflation rates, lower interest rates, stable exchange rate with a consistent level of rupee depreciation, and enhancing reserves.

Critics on the other hand emphasise that the Government’s purported decision to bring ex-Minister Cabraal back into the Central Bank is an indication of how far from its stated ideals of meritocracy and technocracy the Viyathmaga Government has fallen. Successive governments are at fault for parachuting people to the post of Governor. Irrespective of whether such persons did well or not, it is in the national interest that the Central Bank ensures successors to the Governor post within. Given the battering the Sri Lankan economy has taken during the pandemic and fiscal and financial mismanagement, the Central Bank requires a steady hand at the helm, one who can inspire global and local confidence. The private sector is confident Cabraal is the best man and will deliver whilst some have reservations. Another question is whether President Gotabaya Rajapaksa has exhausted all his options in selecting the new captain to steer the ship that is the Central Bank at this crucial juncture.