The Seen and the Unseen-7: Dr. Kenneth De Zilwa new CBSL Deputy Governor?

By Ishara Gamage | Published: 2:00 AM Oct 31 2020
FT The Seen and the Unseen-7: Dr. Kenneth De Zilwa new CBSL Deputy Governor?

By Ishara Gamage

After the present government was formed there have been several interventions in the traditional pattern of governance at the Central Bank of Sri Lanka (CBSL). 

First was the appointment of Professor W. D Lakshman, 78, as CBSL Governor. With many now working into their 70s globally, it was not his age that caught one’s attention but that he was a retired veteran academic, some would say an outstanding one, but with hardly any professional experience either in government policy making or private sector finance and banking. Measured on a global scale, one could compare his selection to that of Ben Bernanke to the Federal Reserve Bank of New York – a veteran academic to a position held predominantly by a string of Wall Street seniors before him.

In recent times, such unusual interventions came in quick succession. Hence caution must be applied. There is simply no room for such debacles.

The resignation of two Monetary Board Members, namely banking veteran Nihal Fonseka and top economist Dr. Dushni Weerakoon in response to a written request from a senior government official were case in point. Both were asked to retire before the end of their terms, in the case of Dr. Weerakoon with several years left to run. 

Then came the confrontational meeting, held in full glare of the public, Chaired by the President. Senior CBSL officials including Governor Lakshman were present. Even if the complaints aired against CBSL of a lack of urgency and weak solutions to a gathering downturn in economic activity were justifiable, the manner and how public the attack on the Governor by the President was unusual to say the least against an institution more used to private negotiations than public argument.  

Later the Commission appointed by the present government in connection with the collapse of the EAP Group and measures to liquidate and compensate depositors ran into severe criticism, again publicly. This time the NBFI Regulator was taken to task with a recommendation for sweeping change.   

Painful farewell

Finally, the move by the Monetary Board/CBSL to approve the pre-retirement leave of two senior Deputy Governors, namely Dr. Nandalal Weerasinghe and H. A. Karunaratne simultaneously, was also controversial. The exit of two senior experienced hands at the same time reeked of disregard for an increasingly difficult operating environment faced by the country.

Indeed, it has been the tradition so far to obtain the services of senior CBSL officers till their last day prior to commencing retirement. Dr. Nandalal Weerasinghe is widely regarded as one of the foremost economists in South Asia. Some are of the opinion that the CBSL needs his services at this time as he has extensive experience working with a number of international organisations, including the International Monetary Fund (IMF).

However, according to CBSL sources during his final days as a Deputy Governor of the CBSL he had a different vision with regard to the economic management of the nation, contrary to the   Governor and some members of the Monetary Board. He was of the view that Sri Lanka should seek the assistance of the IMF to recover from the current external debt crisis. But the Governor as well as the Secretary to the President Dr. P.B. Jayasundara were of a different opinion.

It is in this context that we report the latest non-traditional CBSL action. That it is considering the recruitment of an outsider to fill one of the vacant posts of Deputy Governor. We understand that interviews scheduled to be held on 9 October to fill the vacancies were postponed. In addition, we understand that all the current Assistant Governors of the CBSL are eligible and have applied to fill the vacancies.

Possible arrival of a stranger

It is the norm at the CBSL to fill vacancies according to seniority from within. This time, our sources say, the name of Dr. Kenneth De Zilwa, an economist, a Colombo University student of Governor W. D Lakshman, who is currently the recently appointed head of the reconstituted Financial System Stability Consultative Committee (FSSCC), is being considered for the post. Dr. De Zilwa, is a graduate and PHD holder from the Colombo University and experience with HSBC and Citibank Colombo in marketing Treasury products. He was appointed a Member of the Monetary Policy Consultative Committee (MPCC) earlier this year.  It is thought the CBSL intends to take this step with the aim of introducing new knowledge outside the traditional CBSL culture. We are, however, unable to gain any insights into whether the Monetary Board supports the idea wholeheartedly or view it with reservations. 

Introducing new experience and knowledge may not be altogether negative. Indeed, recommendations to do so have been prevalent for some time and are practiced at other central banks particularly to acquire specific skills not available within a central banking environment. Given a world of complex financial instruments, arrangements and transactions, it is unlikely that even at the highest more experienced levels of CBSL, market related experience will be acquired in the field of corporate finance, money market dealing, and debt: equity swaps, green bonds or derivatives to name but some of the transactions doing the rounds in the markets. The level of non-performing assets (NPAs) alone running across the financial system now close to US$ 3 billion does not indicate a healthy position or that there is deep professional deliberation. Hence, resorting to the market to acquire appropriate new skills is arguably prudent and necessary to discharge the duties of a financial regulator. A caveat here is equally appropriate. Recent experience of hiring outsiders that resulted in resounding losses that still remain open-ended simply generates notions of dubious purpose and damages Sri Lanka as a worthwhile investment destination. 

There is an important lesson here in terms of hiring seniors outside the usual norms. The recent Bond Scam losses originated from negligence in understanding the power underpinning Conflict of Interest when the Gamekeeper and Poacher are intensely related. Given this background in selecting an outsider as Gamekeeper, loose processes, temptingly large sums of money and internal strife among senior CBSL officers meant the outcome was assured and indeed occurred. Hence caution must be applied. There is simply no room for such debacles again and any conflict of interest must be eliminated or a tangible visible process mounted to manage such conflict.

The person and proposal, however, non-traditional, could be 100% timely given the plethora of issues confronting the economy. It is hoped that the Interview/Monetary Board will test and match the skills that Dr. De Zilwa will bring to bear on the issues, similar to the recent confirmation hearings of the new appointment to the US Supreme Court.  

It is also hoped the appointment is within the governing laws of CBSL with no legal impediments. According to the Monetary Law Act, the Monetary Board has the power to appoint a person from outside the CBSL to the post of Deputy Governor on the recommendation of the Minister in charge of Finance.

Although there is certain to be internal opposition within the CBSL to the appointment, that can be considered inevitable with change. The test is always will the new broom sweep as expected. Although only time will tell, it is hoped the Monetary Board can provide reasonable assurances that the new DG appointed outside the norms will not stray outside the remit. 

By Ishara Gamage | Published: 2:00 AM Oct 31 2020

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