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Tuesday September 28th, 2021

Academic turned Sri Lanka central bank chief Lakshman resigns

ECONOMYNEXT – The central bank governor W D Lakshman announced his retirement with effect from September 14 which he said was a decision he advanced “by six weeks” due to some unpleasant incidences without elaboration.

Until he became the central bank governor, he had only taught about central banking theories for nearly four decades as an economics teacher in universities.

President Gotabaya Rajapaksa gave him an ambitious task to practice what he had preached with his appointment as the central bank governor.

Professor Weligamage Don Lakshman’s appointment in December 2014 came at a time Sri Lanka faced as Sri Lanka was limping back from a currency crisis in 2018, triggered by output gap targeting or printing money to push growth up.

Growth had fallen after the rupee was driven down from 153 to 183 and private credit fell as the monetary breaks were hit to prevent and inflation spiked and foreign debt had also grown.

Under his governorship, the central bank again reduced the interest rates to record lows and printed money also at a record level as the country was hit by a high budget deficit from tax cuts worsened by a Covid-19 pandemic.

While maintaining a record low interest rate regime, the central bank launched a re-finance loan scheme for businesses hit by Covid-19 lockdown. Additional support was given by a guarantee scheme without printing money.

However as the credit and economic activity recovered from the third quarter onwards the balance of payments started to give way.

Lakshman promised to run an alternative policies to get out of subdued growth, poverty, and unemployment after decades of efforts by the country’s fiscal and monetary authorities and decision makers failed to identify such alternative policy sets of greater efficacies than what he termed a ‘neo-liberal’ framework.

“The domestic currency debt – if I may also use the term – in a country with sovereign powers of money printing as the modern monetary theorists would argue – is not a huge problem.

“The debt can be rolled over. That is when it is mostly the domestic debt.”

During his tenure Sri Lanka repaid all foreign debt falling due, but foreign reserves were run down as liquidity was injected.

He revealed that he had planned to retire anyway in October when he turns 80, but he decided to retire in advance after “unpleasant” incidences took place in the last 10 days.

“If you read the media reports, you can realize the reasons,” he told a virtual media briefing to announce his retirement. “There have been so many reports without asking me.”

Media reports had referred to a pension scheme in the central bank and the possible appointment of State Minister Ajith Nivard Cabraal resign his portfolio.

When asked if the government indirectly forced him to resign by asking Cabraal to take up the job without consulting him, his response was: “I can’t answer that question”.

He was an old boy and a former head prefect of Vidyaloka College, Galle was appointed as the 15th governor of the central bank since it was established in 1949. He was the preferred choice of Rajapaksa.

The 79-year old professor with strong research capabilities took the challenge of running the central bank prioritizing growth over stability and the country was hit by a series of downgrades.

However, the growth slumped to its worst performance – a 3.6 percent contraction – mainly due to the pandemic-led lockdown weighed on the economic activities in 2020.

In the final monetary policy meeting under his governorship, the central bank reversed ultra loose monetary policy with reserves falling to very low levels.

In his debut speech as the central bank governor, Lakshman said it was a time of important changes in Sri Lankan development policy and practice.

“Questions are being raised extensively about the validity and relevance of Washington Consensus type or neoliberal type policies to achieve the desired goals of inclusive, sustainable and shared development,” the new governor said in his first public speech.

He pledged to engage with the IMF and other multilateral agencies, while remaining within the framework of national policy to ensure that the country reverts to a sustainable path of reserve accumulation.

During his retirement press briefing he said he was not in favour of going to IMF on a continuous basis.

Analysts have blamed Sri Lanka’s unstable soft-peg driven conflicting money and exchange rate policies (trying to maintain an exchange while printing money to target low interest rates) for frequent trips to the IMF.

Before this appointment he served as an advisor to the Ministry of Finance in 2008, the chairman of the Presidential Commission on Taxation in 2009, and the head of the Institute of Policy Studies, the island nation’s independent economic think tank.

Under the previous government headed by Maithripala Sirisena, Lakshman chaired the committee that revisited the Sri Lanka – Singapore Free Trade Agreement and its practical impact and recommended many significant recommendations.

The former Vice Chancellor of Colombo University has been a visiting economics professor in Japanese universities of Ryukoku (1999) and Saga (2007).

Lakshman is the third child of the family headed by W. D. P. de Silva, a businessman, from Mihiripenna, a little-known village in Galle. After his grade five scholarship exam, he entered Vidyaloka College Galle where he became the head prefect following his unmatchable performance in education.

He dropped his preferred subject of Pali to learn economics during his undergraduate days at University of Peradeniya.

Later he became one of the pioneers to write a book in Sinhala titled ‘Aarthika Vishleshanaya’ (Economic Analysis) when he was the assistant lecturer at the same university from 1964-1968, to help students learning in Sinhala language.

Lakshman has later said he was able to part finance his higher studies at Oxford from the profit of this first book. (Colombo/Aug10/2021)

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