Sri Lanka central bank controversy with President erupted without prior discussion: Governor

ECONOMYNEXT – A tongue lashing given by President Gotabaya Rajapaksa over a delay in the central bank giving loans with re-finance (printed money) erupted without prior discussion, but the issue has been resolved a channel of communications established, Governor W D Lakshman said.

“This is something that had given rise to a lot of debate, accusations and counter accusations,” Governor W D Lakshman told reporters in Colombo in Sinhalese.

“The central bank as a representative agency of the government, as part of it, has to do certain thing on behalf of the government.”

The issue raised new questions over the independence of the institution which had depreciated the currency from 4.70 to 185 to the dollar since independence from British rule in the worst performance among pegged South Asian monetary authorities through money printing.

President Rajapaksa slammed the central bank in public after summoning Governor Lakshman to his office, over a delay in giving credit to Coronavirus affected companies with printed money (central bank re-finance) at time when the rupee was already under pressure and imports were controlled.

Responding to questions from reporters Governor Lakshman said there had been no prior discussion before the institution and officials were summoned for the meeting.

“If such a question had been asked it would have happened in a different way,” Governor Lakshman said.

“Later when there were problematic situations on two occasions, the problem was solved in that way. I acted and got a discussion early we have started a process to inform the Prime Minister and President.

“We have now solved this problem and are working with some agreement.”

President Rajapaksa’s brother Mahinda Rajapaksa, who is Prime Minister is also the Finance Minister.

“About this credit program, the Cabinet took certain decisions, and the central bank was informed to carry them out,” Governor Lakshman explained.

“Usually the Monetary Board meets, and decides on the most appropriate way and implements it.”

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By the time the order to re-finance (print) 150 billion rupees came the central bank had already decided to re-finance 50 billion rupees, which also exceeded the agency capital calculated at about 28 billion rupees.

“In the series of events that were shown as controversial what happened the Monetary Board had met twice at special meetings and were discussing,” Governor Lakshman said.

He after a discussion late into the night, a way was found to implement the decision which had to be ratified through a Board Paper the following week, when the controversial took place.

“But as I said we had arrived at a way do after at least three rounds of discussions when this sad event happened,” he said.

There have been calls to reform the institution to give it more independence and the new administration also suspended a monetary law that would have given it more independence.

But in 2018 the central bank engaged in pro-cyclical policy and also created liquidity through dollar rupee swaps and triggered a currency crisis without any political pressure when full de facto independence had been given raising questions about the validity of central bank independence, unless the agency was committed to providing monetary stability.

Sri Lanka’s central bank was one of a series of soft-pegs set up with assistance of experts from the Federal Reserve’s Latin America department in particular with sweeping money printing powers that generated severe monetary instability and political unrest, critics say. (Colombo/July 14/2020)