Could the new governor of the Central Bank alone seize the nettle? | Print edition
By Dr. G. Tantirigama
It is heartening that the government has prudently taken the wise decision to appoint an experienced and capable governor with a strong track record for the Central Bank (CB) – Dr. Nandalal Weerasinghe who has stepped down as Deputy Governor from CB major. after a long service of more than three decades. The appointment of this senior official undoubtedly created a sense of confidence among the population and other stakeholders that he would bring about significant changes in order to consolidate the crumbling image of the BC. Our best wishes to Dr. Weerasinghe and his skillful lieutenants for successfully solving the problems and helping to overcome the crisis as much as they could.
At the first meeting of the Monetary Council itself, he took an ambitious decision to control the ever-increasing inflation which unofficially exceeds 40% by raising key interest rates from 7% to 13.5%, which which will have a cascading effect on the economy and the financial market. It must be admitted that the idiotic measures adopted by the two previous governors led to aggravation of the economic mess that Sri Lanka had already known for several decades. They were impervious to the realities of the economy and the money market and they bellowed rhetoric and adopted foolish measures to make the situation worse. Instead of stopping the worsening economic and financial situation, they have pathetically failed to stop the economic downturn and the BC has also gained notoriety for callously disregarding people’s grievances at a time when people are struggling to make ends meet.
It is in this context that the appointment of the new governor must be considered. It is unfair for us to expect short-term miracles from the governor of CB. One might tend to think that the appointment of the new governor is the panacea for all the economic and monetary ills facing the country. It’s not like that. There are many things that fall outside the legitimate jurisdiction of the Governor of CB. Anyone with a rudimentary knowledge of basic economics could understand what the BC Governor can and cannot accomplish given his tenure as BC Governor. There can be no random micro-solutions to the macro-problems facing the country.
I have attempted to enlighten readers in layman’s terms on the legitimate role that the Governor of BC can perform in alleviating the suffering of the economy.
Basically, any economy has two sectors, namely the “monetary sector” and the “real sector”. It is similar to an ox cart driven by two bulls. Suppose a bull represents the monetary sector led by the Central Bank. The key elements of the monetary sector are monetary variables such as interest rate, exchange rate, money supply, etc. The Central Bank has full control over policies that affect the functioning of the monetary sector. The CB is empowered to introduce policies that affect key macro-monetary variables that ultimately lead to the achievement of a stable and growing economy.
The other bull in the oxcart represents the real sector. The real sector referred to in economics is commonly referred to as the “fiscal sector”. The main elements related to the real sector are government income and expenditure, savings and investments, etc. These real sector variables directly affect economic output or, in simple terms, the production and supply of goods and services. Management of the real estate sector is carried out by the Cabinet through the Ministry of Finance. For example, decisions on tax policies, prioritization of public expenditure and investment are taken over by the Cabinet through the Ministry of Finance and Treasury. Given the inherent weaknesses in the cabinet structure, the Ministry of Finance has the primary responsibility to deal with the policies necessary to ensure the proper functioning of the real sector.
Two bulls, the financial sector and its instruments on one side and the real sector on the other, pull the cart independently. However, they must ensure that a joint force is applied to move the cart forward. As this is a very turbulent situation, both bulls will have to push the cart cautiously and in tacit agreement as illogical and reckless political, monetary and fiscal policies taken by successive governments have escalated the problems to a tipping point. the country has never seen in its history for the past 74 years. This literally means that both bulls will have to pull the cart up a steep slope ahead of them. Two bulls (Central Bank Governor and Finance Ministry Secretary) have Herculean tasks ahead of them in the next couple of years. It must be explicitly mentioned here that the success of moving the cart forward does not depend on a single bull. It is therefore crucial that the two bulls become two equal engines to pull the economy through this difficult terrain towards a common goal.
Heads of government such as the President and Prime Minister are the ones who steer the cart with canes in hand to properly steer and encourage the two bulls towards the overall goal of government – this is to ensure an economy and trouble-free elevation. of people’s well-being. The economic and financial misfortunes that the country is currently going through are the cumulative result of the irresponsible monetary and fiscal mistakes made by the current regime. Readers will recall that as soon as this government came to power; he granted unwarranted tax concessions to their cohorts at the expense of the country’s revenue. The notorious sugar scam has deprived national coffers of billions in revenue. The diversion of billions of dollars to Ozymanian projects such as Hambantota Port, Suriyawewa Cricket Stadium, Mattala Airport and the Lotus Tower does not yield an adequate economic rate of return for the investment made which, in its turn, has aggravated the currency problems today. .
In this context, the appointment of a former member of the BC as Secretary of the Ministry of Finance is certainly a bold and sensible step so that both the Governor of BC and the Secretary of the Ministry of Finance can carry out their heavy duties together. for a common goal.
The CB, as the monetary authority, should act more responsibly in dealing with monetary objectives of price stability, exchange rate fluctuations, etc. But the CB cannot interfere in decisions relating to the real sector or the fiscal sector. On the other hand, the Ministry of Finance has full authority to make decisions regarding the real sector. But they have no control over the interference of the BC and its monetary policy instruments. What is important is that they are supposed to have good coordination although they act independently.
It was a pleasure to note that Dr. Weerasinghe in his press conference described his policy instruments and mentioned that the two institutions i.e. BC and Ministry of Finance will work closely together. In my opinion this is good news. But not enough. We only know his strategies. To overcome the current crisis, the strategies affecting the financial sector are not adequate. To succeed in this massive operation, a well-designed real sector or fiscal package is also essential. If one bull does his job properly while letting the other bull drag on, the desired goals cannot be achieved. Therefore, the general public expects the Secretary of the Ministry of Finance to also present a policy package including his strategies to complete the CB policy package and explain it to the stakeholders.
This is not the end of the story. Overcoming the current crisis as quickly as possible is one thing. Leading the country onto a new path of sustainable growth is another aspect. Ensuring that appropriate policies are designed and implemented to transform the current import-dependent economy into a more production-based one is key to achieving the long-term goals of a stable economy and improving the quality of life of the general public in Sri Lanka. The role of political leaders is to facilitate the efforts of the BC, the Ministry of Finance and other interested parties, not to sabotage them through sinister political gains.
(The author is a former senior lecturer at the University of Sri Jayewardenepura
and former Senior Economist, Department of Transport, New Zealand)
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