Don’t succumb to ‘monetary politics,’ Wijewardena advises the Central Bank in his newest book

Our columnist and former Central Bank Deputy Governor, W.A Wijewardena, is to launch his newest book titled ‘Central Banking: Challenges and Prospects’ at a ceremony to be held at 6 p.m. on Saturday, 29 July, at the Mövenpick Hotel at Colpetty. The occasion will be graced by the Senior Minister Dr. Sarath Amunugama as the Chief Guest and Central Bank Governor Dr. Indrajit Coomaraswamy as the Guest of Honour. The book will be introduced to the audience by Iowa University’s Adjunct Professor Dr. H.N. Thenuwara. 

The book contains 20 articles authored by Wijewardena on principles of central banking, its independence, its governance principles, monetary policy and system stability policy and its profit making and so on. Some of the articles are the updated versions of his weekly column in this paper. The last professional job done by the late 

Dr. Saman Kelegama has been a preview of this book which has now been incorporated in the book as its Foreword. We reproduce the preview of the book by Dr. Kelegama:

Central Banking cover page

By Dr. Saman Kelegama

At a time when the conduct and standing of the Central Bank has come into increased public scrutiny, the release of this publication titled: ‘Central Banking: Challenges and Prospects’ is timely. The volume contains articles written by the Author for various lectures, journals, newspapers, etc., over the last decade, but these essays have been updated to reflect the current economic realities.  The essays have been organised in a manner that introduces the subject of central banking systematically.

Although the ideas and views on socio-economic developments have changed over the years, the core principles that are embodied in the philosophy of central banking have not changed. As the author Wijewardena has argued, they have become more stable and systematic today than 60 years ago. 

The solid foundations laid by the first Governor of the Central Bank of Sri Lanka, John Exter, by  putting in place various safeguards and checks and balances to minimise undisciplined monetary management has gone a long way in maintaining reasonable price stability in Sri Lanka. In fact, Exter’s wisdom was to create an environment for both Government and the Central Bank to have a peaceful and amicable cohabitation, thus enabling them to achieve a coordinated and sustainable socio-economic policy. He foresaw issues of monetary policy, especially those relating to fiscal policy, on which the Central Bank should work in close harmony with the government. Hence, for this purpose, maintaining the autonomy of the Central Bank received special emphasis in Exter’s writings. 

A central bank has a prime mandate of maintaining price stability of an economy. An independent central bank that cannot be controlled by politicians or power groups can always work to fulfil that mandate. However, governments can also take control over central banks to fulfil their objectives such as allowing people to lead an easy life by producing more money and win elections by using that wrong strategy. 

Since more money today will lead to inflation tomorrow, it is simply exchanging tomorrow’s inflation for today’s votes. Since governments can take control of monetary policy actions of central banks, according to the author, monetary policies have become ‘monetary politics’ – allowing politicians to use the central bank’s discretionary powers to their advantage. 

The Secretary of the Treasury sits as a voting member of the Monetary Board of Sri Lanka. It is normally via this conduit that the Government sends its message to the Monetary Board. This has become an issue in regard to the independence of the Central Bank and has been raised at numerous public fora. However, a solution to this issue is yet to be found.  In this context, the author’s argument that a central bank should not make losses, and use the profits to build the net worth to a sufficient level to gain independence to carry monetary policies robustly is valid.

The Author addresses a gamut of issues on: (a) The Central Bank as an adviser to the Government, (b) What central banks should talk on (c) Role of the Central Bank as an impartial spectator, and so on. These are all important issues for modern-day central bankers and others engaged in the financial sector and policy formulation. 

To highlight the Central Bank’s role as an adviser, the author recalls  past events of the then Finance Minister, Dr. N.M. Perera, respecting the Central Bank’s decisions and instances of some other Finance Ministers refusing to follow the advice of the Central Bank and facing adverse consequences. What society expects from the Central Bank is to provide advice to the Government at the correct time, dispassionately, objectively and impartially and not to be a policy owner. 

In this context, the Central Bank Governor’s role becomes equally important. The person holding that office should be of ‘unquestioned integrity’ and not a loyal follower of the political establishment who praises Government initiatives. 

The unprofitable Mattala Airport and the Expropriation Act (2011) that violated the property rights are among some of the examples quoted by the author where the Central Bank went to praise and become a policy owner of the political regime. Clearly in these instances, the independence and standing of the Central Bank were sacrificed for petty political gains. The author emphasises that the Governor and the members of the Monetary Board should not be selected on the basis of past political loyalty but on the knowledge and experience they command over economics, finance, and banking and other attributes.

The volume is an outstanding contribution to the contemporary issues confronting the Central Bank of Sri Lanka. As an economist of wide experience, Wijewardena has an analytical background as well as the insights, and an interest to weave together a narrative of the issues relevant for Sri Lanka. The economic and banking highlights that have unfolded in the post-independence years are described and analysed in terms of their interactions and in the light of the author’s deep commitment to justice and fair play. 

It is noted that the spotlight is not exclusively on Sri Lanka, developments elsewhere are also subject to discussion and the analysis enriched by the author’s rich background of experience in the worlds of Banking and Finance. The book is thus more than a critical retrospect of central banking in Sri Lanka. It is a pointer to the way in which future challenges of central banking need to be faced in a more open and transparent environment. 

More specifically, it is a timely contribution towards the quest for a mutually-reinforcing and integrated process of economic and central banking development in Sri Lanka. For all this, Wijewardena’s work is commendable and merits our appreciation and gratitude.

(The writer was Executive Director, Institute of Policy Studies.)

Senior Minister Dr. Sarath Amunugama                                  Central Bank Governor Dr. Indrajit Coomaraswamy

Former IPS Executive Director Dr. Saman Kelegama