“There, cannot be a larger misery than a compulsion loaded on the unsuspecting, innocent and helpless people who have no way of escaping a merciless economic disaster that did not become a reality overnight because the very sentinel – the Central Bank of Sri Lanka (CBSL), for some reason or reasons had not functioned at all as it should have functioned.”
The recent eye-opener by Chandrasena Maliyadda, “Central Bank, its independence and us” in Daily FT on 20 July 2022, attracted the attention of many. It had been stressed that the need of the hour is an independent Central Bank. But its relevance or impact on surviving the current economic crisis was not spelt out. It was very correctly hinted that the independence may be for the survival of the Central Bank and its officers who spend time in air-conditioned rooms away from the crisis, only, as there cannot be any benefits beyond, as the entity – the Central Bank, should have a living economy first.
Central Bank- Just another harmless entity?
The Central Bank of Ceylon that was established by the Monetary Law Act (MLA) No. 58 of 1949, was definitely an essential establishment that had a role to play. It was well equipped and logically well-staffed and it was an institution that continued the traditions that started at the University of Ceylon that provided scholars who were destined to man positions which were noted as the most essential seats of knowledge. Most of the outstanding students of economics ended up in the Central Bank and their vigour and commitment continued their influence. Although it was not the best that happened in the political history of Sri Lanka, the signs that started after 1953 about the necessity to have more futuristic aspirations prompted the scholars of the Central Bank to be more enthusiastic.
The year 1956 marked a drastic change in ‘national sentiments’ had unhealthy aspirations when it came to political aims but became more meaningful towards the national economy. The necessity to have a kind of a guided plan was a correct approach, towards the country achieving economic strength became well understood. The Central Bank became the ‘nerve centre’. The real changes started after 1970 with the feeble efforts to return to pre-1956 status. The 1971 Insurrection became the climax of the near aimless wandering.
Central Bank- Becoming a vitally important entity
Now when we look back, it gives only some kind of pain that cannot be defined. It is a pain linked to regrets which would remind us of failures, except for the brief spell that would make us feel that the Central Bank was under the best and the right kind of authority that materialised as the able leadership of Dr. N.M. Perera and Prof. H.A. De S. Gunasekera who became directly involved. They interpreted the Central Bank’s role well and influenced the commercial banks, ministries departments that included Sri Lanka Customs. The sincere ‘go-getters’ like Dr. Colvin R. De Silva, Peter Keuneman, T.B. Subasinghe and all the socialist administrators like Doric De Souza became exemplary and effective. One of the best things that could have happened, happened then. It is refreshing to note that, the small measures taken became very effective.
Import Substitution and Export Promotion became the key words and the Central Bank spelt out the measures. One such example was the Foreign Exchange Entitlement Certificate Scheme (FEECS) which encouraged foreign exchange savings by way of a system that called for a Duty Guarantee / Duty Rebate system that supported exporters. According to that system, all export oriented imports could be cleared under a bank guarantee which was called Duty Guarantee and that got settled with the Duty Rebate that was awarded after the relevant export was effected.
Attached to that, there was another incentive and that was the CRA = Convertible Rupee Account-which allowed an exporter three per cent of the export earnings, made available for the exporter to import for personal use.
Both those schemes promoted Foreign Exchange earnings while encouraging its conservation.
The point I wish to raise here is the fact that the Central Bank was one of the most important wheels on the machine and the role of that wheel was the control and coordination. All the exporters knew what they were expected to do.
That kind of an environment prevented misusing foreign exchange. An export cycle passed through imports, clearance of cargo using Duty Guarantees and then when the export was effected, the Duty Rebate was processed and the obligation came to an end. The exporters were busy competing to become the best.
The coordination did not end there as the Central Bank was keeping all the commercial banks under its supervision, and aspects such as Duty Guarantees. It was a time when the Central Bank acted in the expected manner and the effect was very positive as the reserves started growing. It was a case of simple logic-producing resources to pay for essentials. It is this process that takes place, in the economy of any country. As no nation has been gifted with all the resources, it is unavoidable that it is that surplus that has to create enough revenues into a one convertible strength to solve that problem.
Why did the Central Bank become so important?
In the same manner that no one shall be ‘self-sufficient’ it is necessary that some surpluses are created in whatever possible and that is exactly what a simple farmer would do. He will use his surplus by converting into money and uses that to buy his family’s other needs. A country or a nation is made up of such families and it is those individual surpluses converted, which becomes that country’s revenue and that revenue should be enough to what is needed. The organised plan for creating surpluses shall become the plans for all the activities in an economy. We name them as industries having agriculture as the most basic with mining coming next and so on. The human labour component is named as ‘services’. In this kind of a ‘kindergarten explanation’ the activities of a nation can be described and we can call that collective picture as the economy of a country.
A government of a country plans for the national combination of needs. A farmer will think about his family’s needs and a village blacksmith will think about the total revenue needs and he is sane enough to understand that he cannot make that good by doing what work that comes to him only and therefore find time to create some additional support.
Families and individuals will think at their personal levels, and logically, it shall be the Government making the plans. As the individuals will be committed to monitor, whose responsibility shall it be to monitor on a government’s behalf?
That was why it becomes necessary that there should be some well-connected authority to monitor the economic performances of a Nation. In different countries that have different names for such entities but by their functions they are the same. Here, we have the Central Bank of Sri Lanka.
The misconception that Central Bank is doing just a ‘guard duty’ is just hilarious as the position taken as, “Our job is managing Monetary Policy to ensure the stability”, is simply an irresponsible statement, some ex-Central Bankers gloating by stating that “…..how cleverly and vigorously they conducted tough negotiations to beg and borrow an additional Dollar to augment the Foreign Exchange Reserves” is definitely not a feat to brag about.
Beginning of the End
It started with the regime change in 1977, with the Central Bank getting away from its position of responsibility and accountability. The forces of ‘Open Economy’ encroached the recovering economy of Sri Lanka. We were an economy trying to stabilise the National Resources, nut became exposed to all the imaginable as well as the unimaginable destructive forces that acted mercilessly. The new class of businessmen gave a false sense of confidence, and the shortcuts strengthened such feelings, and slowly, the Central Bank was reduced to a glorified record keeping agency, where even the veracity of the records could be based on guesswork, duly certified as authentic as those came from the actually existing sources.
Although it happened to the contrary, the Central Banks cannot escape from the responsibility for the negative developments, as such establishments are responsible collectively. Sri Lanka witnessed the economy being driven from once a developing economy down towards an environment where free trading took over the cautious operations, evolving into a begging and a debt-driven trading economy. All the Governors had talked of debt restructuring, as it was always the case. In order to get the grip of the issue the Central Bank should have been in the middle planning national targets and following up debt sustainability do that everything was disciplined. But what happened was just the opposite and the experts could explain just how those things had happened.
The open economy that came after 1977 closed all possible avenues for a self-sustaining economic environment to embrace a system where it became a game for importers to be smart and become speculators to make a ‘fast buck’, caring a damn for the economic independence to end up as a new tradition and a set of traders who always made money in every transaction they did without caring about sustainability.
The simplification of import procedures gave the finishing touches to the coffin for the Sri Lankan economy and it simply happened unaware as the planners did not bother.
A sizeable chunk was for uncontrolled imports of motor vehicles and almost all types of flashy cars, where foreign exchange reserves ended up can be understood by visiting used car parts yards in Sri Lanka. It is valuable foreign exchange appearing as non-moving stocks, offered as security collaterals to the Banks and Banks have not supported their best clients.
It is this loose system of controls by the Central Banks that has allowed things to happen like that. Then the so-called experts on monetary policies hold post-mortems. It is evident that the senior functionaries of the Central Bank had been reduced to ineffective officials as the Central Bank has now become just a rubber stamp only.
The agony of Sri Lanka is not something that fell from the sky as what we are going through now is a result of the total indifference shown towards the signs which indicated a very grave end. In the meantime, those who enjoyed being top officials just acted only to survive while the problem related to IMF was getting more and more complicated. Those responsible officials acted only as a post box, by keeping matters updated only to show what was happening around. Beyond that it was not their responsibility, and it is the possible outcome as finding solutions was not their concern. This makes one wonder why nothing remedial could happen in spite of the fact that the Central Bank was officially present in the provinces too.
If the history of the Central Bank’s activities is analysed, it shall be proved that it had been reduced only to an incidental presence and nothing beyond, just a namesake.
Prof. W.D. Lakshman wished to promote a debt-free country but could not continue and the circumstances led to his resignation, not to mention the court cases he may have to face. Although things were kept away from common knowledge, it is now known that Prof. Lakshman was doing his best to hold the exchange rate stable when the par value of the Dollar or the Rupee value of the Dollar was lower. It is said that he had come under severe criticism, some had argued it would promote diverting Dollar earnings from official sources to the black market. So, the die-hard supporters wanted the Rupee to be floating. His successor let the Rupee float and now it is around Rs 360 to a Dollar. But did black market disappear?
Dollars did not come through official sources. What such theoreticians do not have the simple knowledge to understand how negatively that will affect the Value Adding Industry and its effect on the imported foods where even rice, which is the staple food, is also affected. Cannot they understand simple economics that the Sri Lankan cost of production will rise and retard growth?
The effect of the Covid-19 pandemic hit the economy so mercilessly, economic growth became non-existent. It was the initiative of the Central Bank that mitigated the effect on the economy. The Central Bank took necessary steps to ease the burden on the general public during that disruption of global scale, while preserving its legal mandate to maintain economic, price and financial systems stable as much as possible.
Mistakes are the best teachers. We have made our mistakes and now there should not be any difficulties in understanding where we had gone wrong.
Let us understand what the IMF wants and that is where our planning should start. Divide the amount into four blocks and take it as four periods of six months each and have a financial target for each block of six months.
First six months – agricultural awakening- targets for import substitution. Even if the results are not realised, the signs of achievements shall be visible. With a sound distribution system the people shall be at least better fed.
Second six months – consolidation of agricultural targets for import substitution, can be supported by minor exports to some selected markets from where, some of the most essential imports can be initiated. That way, the local markets shall be well supplied. The sound distribution system already introduced shall ease the needs related problems.
Third six months – consolidation of agricultural targets for export and import substitution, can be supported by regular exports to some selected markets from where, some of the most essential imports can be initiated on a barter system. That way, the local markets shall be well supplied and the market prices shall be regulated. The prices can start coming down.
Fourth six months – consolidation of programmed agricultural production mainly for export and import substitution, supported by regular exports of high quality agricultural produce to some selected markets from where, some of the most essential imports can be initiated on a barter system. That way, the local markets shall be well supplied and the market prices shall be regulated. The prices can start coming down.
That way, Sri Lanka’s Recovery can become something realistic and achievable.
By Ananda Ariyaratne