ECONOMYNEXT – Central Bank independence must be matched by accountability and a mechanism for public oversight, a top economist said as Sri Lanka is moving towards a modified inflation targeting framework with legal changes to end interference from the finance ministry.
In Sri Lanka and elsewhere central banks have been forced to print money to finance budget deficits, generating balance of payments troubles, currency depreciation and inflation, a phenomenon known as fiscal dominance of monetary policy.
However central banks themselves can depreciate currencies through Mercantilist ideology in a type of trade-oriented monetary policy, or print money in the course of policy errors to create inflation and asset-price bubbles hurting the common man.
In Sri Lanka due to past experience, economists and analysts have called for central bank independence in the hope that that its managers will generally will want to provide better money.
As part of a law to bring in modified inflation targeting, the central bank is on track to get more independence.
"However independence without accountability will have the adverse repercussion of creating a monster within the sovereign government of Sri Lanka," W A Wijewardene, a former Deputy Governor of the Central Bank, said delivering the agency’s 68 the anniversary lecture.
"That will not be acceptable to either the political authority or to the public.
"Hence, greater public scrutiny and oversight should be exercised over the work of the Central Bank once it is granted a greater degree of autonomy."
He said that in the US, the Chairman of the Federal Reserve has to come to the Congress (parliament) and answer questions from legislators every six months.
Wijewardene said since not all legislators will know enough about monetary policy, they have to be backed up by a group of expert of the field.
But the process first has to start by the appointment of the Governor of the central bank and members of the monetary board.
"First, it is necessary to introduce a nomination, screening and selection process for the Governor and the board members as is being done in the case of the Bank of Canada or the Bank of England," Wijewardene explained.
"The present method, though it is not a reflection on the incumbent office holders, is marred with the possibility of subjugating themselves to the wishes of the political authorities which have appointed them."
Before the appointment of the current Governor Indrajit Coomaraswamy, the central bank was embroiled in a securities scam, and amid pressure from the public and civil society groups, President Maithripala Sirisena refused to re-appoint then Governor Arjuna Mahendran.
A Presidential Commission which went into the securities scam has suggested that the laws be changed so that the central bank governor is appointed via a constitutional council.
The body was set up to make senior public officials to be independent and allow them to act impartially without being punished or transferred by politicians for doing the right thing, after the abolition of the position of permanent secretaries destroyed Sri Lanka’s public service and made it a rulers’ service instead.
Wijewardene said the administration and financial works of the central bank should be made transparent.
"At present, such a disclosure policy has been adopted by Bank of Canada with respect to foreign travel and entertainment by senior officers and board members of the bank," he explained.
Under inflation targeting the central bankers have to raise interest rates until inflation is brought down to a target set usually in agreement with the parliament of finance ministry.
Central banks can no longer control money supply in the hope of getting inflation down and give real economy excuses to a gullible public for failing to generate the low level of inflation agreed.
When New Zealand first introduced inflation targeting, the architects of the law dropped the monetary policy committee which allows those responsible for inflation to ‘pass the buck’ and made the Governor personally responsible.
The Governor can in theory be sacked for generating too high inflation. Inflation fell remarkably. (Colombo/Aug30/2018)