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Last week’s Committee on Public Enterprises (COPE) inquiry into the Central Bank (CB) and the economic situation revealed some rather distressing, but not surprising, revelations. The complete politicization of the CB is no surprise to any Sri Lankan; after all it is not always one leaves their ministry portfolio and is rewarded with the governorship of the Central Bank to tweet angrily at ratings agencies.
In December 2019, Dr. Indrajit Coomaraswamy resigned from his role as Governor of the CB and Prof. W.D. Lakshman was appointed by the president to take over. On May 2020, Nihal Fonseka and Dr. Dushni Weerakoon both resigned from the Monetary Board (MB), both well before the end of their six year fixed appointment periods. Dr. Harsha De Silva claims they were both forced out of the MB.
Mr. Sanjeeva Jayawardena PC was appointed into the MB in February 2020, Dr. Ranee Jayamaha and Samantha Kumarasinghe were appointed on June 26, 2020 by approval of the Constitutional Council that existed after the eighth parliament had been dissolved on March 2, 2020. The chair of this council was Speaker Karu Jayasuriya and included such members as Prime Minister Mahinda Rajapaksa, Mr. Bimal Ratnayake, Ms. Thalatha Atukorale, Mr. Javed Yousuf, Prof. Naganathan Selvakumaran and others who unanimously approved the appointment of both nominees.
Perhaps it was getting too hot for Prof. Lakshman because in September 2021 he stepped down and Mr. Ajith N. Cabraal, who had recently vacated his seat in parliament (which would otherwise disqualify from being a part of the CB), was appointed as the Governor of the CB and by extension the chair of the MB.
Prof. Lakshman is now the chair of Econsult Asia, although the website seems to have been updated and he is no longer featured on it. Suspicious, but fear not as the internet never forgets. He is alongside none other than Dr. P.B. Jayasundera as the Deputy Chairman. Other representatives of Econsult such as Dr. Kenneth de Zilwa are vocal proponents of Modern Monetary Theory (or printing away debt), of import substitution-led industrialization and have written extensively about not going to the IMF.
Dr. Ranee Jayamaha is a career central banker and in fact her PhD is in monetary economics, so her appointment to the MB is sensible, regardless of any political loyalties. The chair of the MB during the past 2.5 years was either Prof. Lakshman or Mr. Cabraal. Mr. S.R. Attygalle, who was appointed as the secretary to the Treasury in November 2019 by the president, was the third member throughout. The fourth and fifth members were Dr. Jayamaha and Sanjeewa Jayawardena.
Mr. Sanjeeva Jayawardena is not an economist; he is a lawyer and the closest relationship to economics he seems to have is that his father was a member of the MB in 90s. He does have quite a stellar record of legal representations having represented a hodgepodge of colourful characters like former president Maithripala Sirisena during the constitutional coup in 2018 and a bunch of petitioners challenging the Millennium Challenge Corporation and Status of Forces Agreement agreements in 2019.
Interestingly in May 2020, he appeared on behalf of notorious monk, Muruththettuve Ananda Thero to defend him against eight fundamental rights petitions challenging the decision made in March 2020 by President Gotabaya Rajapaksa to dissolve parliament early to hold parliamentary elections.
Mr. Samantha Kumarasinghe is also not an economist. He is a businessman with a chemistry degree and claims to be an alumnus of the Harvard Business School. He is a typical mercantilist, repeatedly calling for protectionism in trade and to close borders for multinationals and foreign investors. He is walking contradiction; he owns factories all around the world but he does not wish any foreigners to set up their factories in Sri Lanka.
In an interview on Ada Derana in November 2019 he chastised governments “which try to satisfy the World Bank and IMF and ignore local industrialists” and said that such governments have “repeatedly shown that the strategies [..] won’t help the local economy”. In December 2021, Mr. Kumarasinghe gave an interview to the Lankadeepa paper in which he states that “there is a theory that when interest rates rise, the demand for money falls. I do not believe in this theory”. Suffice to say he is no monetary policy expert.
Prof. Charitha Herath, Chair of COPE, summoned officials of the Central Bank and the Treasury to inquire into the current economic situation in the country. So damning was the revelations made at this inquiry that Prof. Herath, who is otherwise quite happy to cheerlead the Rajapaksas, has recommended a Parliamentary Select Committee (PSC) be appointed to inquire into the causes of the economic crisis and to determine the role of the involved officials who neglected their responsibilities.
Upon MP Patali Champika Ranawaka’s questioning, it was revealed that the President Gotabaya Rajapaksa-led government had made a request to IMF in March/April 2020 for a Rapid Financing Instrument (RFI) but the IMF had refused on the basis that Sri Lanka’s debt was unsustainable. In November 2019, when the IMF submitted its sixth review of Sri Lanka, the report clearly states that “external debt is sustainable, but rollover risks remain high over the medium term in the context of relatively low reserve coverage”. So, what happened between these two periods?
President Rajapaksa’s tax cuts of 2019 ended up costing the government Rs. 600 billion. As Dr. Harsha De Silva points out correctly, between the span of five months, and before Covid-19 had fully gripped Sri Lanka, the IMF had deemed Sri Lanka’s debt to have become unsustainable. The only significant measure that had been implemented by this time was the Gotabaya-Viyathmaga “trickle-down” tax cuts.
Interestingly, Dr. Nandalal Weerasinghe also points out that it was President’s Secretary Dr. P.B. Jayasundera who had held the senior level discussions with the IMF at the time, and that Treasury Secretary Mr. Attygalle played second fiddle although he is the senior treasury official who is entitled to lead such discussions. Dr. Jayasundera had, at that point, told the IMF that Sri Lanka will not restructure its debts and will instead manage somehow. Who empowered Dr. Jayasundera to make such a decision?
Mr. Sanjeeva Jayawardena, who also chairs the MB Level, External Debt Monitoring Committee, said that Dr. Jayamaha and he had, on several occasions, urged the MB to consider gradually floating the exchange rate in conjunction with the prevailing market demand. Mr. Jayawardena says that due to the lack of dollar liquidity in the banks, the CB had spent $2.2 billion of its reserves to defend the rupee at this rate. Dr. Jayamaha states that Prof. Lakshman, Mr. Attygalle and Mr. Kumarasinghe formed the majority in favor of defending the rupee and disregarded Dr. Jayamaha’s and Mr. Jayawardena’s warnings.
Now, $2.2 billion is not a trivial amount. It is nearly one-third of the forex reserves Sri Lanka had at the end of 2019 ($7.5 billion). It is about seven months of fuel imports. Our annual fertilizer imports are one-tenth this amount (~$200 million). We could have bought about four years’ worth of medicines and pharmaceuticals with that amount. We must also consider the fact that this fixed exchange rate caused about $1.6 billion of worker remittances to not flow into the banking system.
On March 7, the day the rupee was floated, Mr. Jayawardena states that the MB decision was to allow flexibility on the rupee up to Rs. 230 per dollar but that Mr. Cabraal, the governor at the time, had met on his own with the banks and it had somehow turned into a complete free float, confusing the markets and causing the rupee to rapidly depreciate. Well, it is too late to tell us now, when the dollar is over Rs. 350 rupees.
Mr. Jayawardena states that the MB made several assertions to gradually reduce the CB’s exposure to government securities. Regardless, in the two years in which Mr. Jayawardena continued to function as a member of the MB, CB’s exposure to government securities grew from Rs. 310 million by end 2019 to Rs. 1,565 million by end 2021. If it was the MB’s decision then who authorized such large purchases of government securities?
Although both Mr. Jayamaha and Dr. Jayawardena claim no responsibility for the decisions to float the rupee or in the act of printing money, both have served continuously on the MB throughout this period. Surely Dr Jayamaha, who is well versed on the subject of monetary economics, knew the damage it would cause to the economy. With low interest rates, forced low fixed exchange rates and the CB acting like the governments ATM, it was obvious to a rational observer that the rupee was going to depreciate rapidly once the flimsy chains that bound it were removed.
In this context it is fair to ask, if Dr. Jayamaha and Mr. Jayawardena objected to these decisions that would severely damage Sri Lanka’s already fragile economy, why did neither of them step down from their roles? Resign and indicate that things were going awry. They claim their arguments were dismissed, if so, then why stay on in a board on where one’s ideas, which are objectively correct, are dismissed, particularly as it pertains to the lives of 22 million people? Were they willing to sit by while knowing what devastating consequences would ensue?
As Dr. W.A. Wijewardena points out in his column this week, “It is the state which is sovereign and not the government. Both the government and the Central Bank are two arms of the sovereign state created for a purpose.” He is right of course; it is not the role of the CB to accommodate every request of the government or be subservient to political whims but to act in the best interest of the state and preserve its mandate of delivering price stability and financial system stability. It is for this reason that MB members are appointed for six year fixed terms so that political changes cannot superimpose on the independence of the MB’s functions.
But both price stability and financial system stability are now in complete shambles. Inflation is almost 40%, food inflation is unbearably high, close to 60%. The local banks, especially state owned banks, are under significant distress due to the sheer amount it has lent to underperforming state owned enterprises such as the CPC and CEB. At a high level, it is the Rajapaksas and their close advisors such as Dr. P.B. Jayasundera who are responsible for avoiding and delaying IMF and debt restructuring until it was too late. At a level below, it is the members of the MB responsible for the excessive money printing, the fixed exchange rate fiasco and low interest rate regimes.
The COPE committee has requested for the minutes of the MB’s meetings to be tabled to the committee to ascertain the truth of Dr. Jayamaha and Mr. Jayawardena’s statements. These findings must be revealed to the general public because it is the life of the general public that is in disarray. We shall find out more but it is undoubtably true that the MB, regardless of what opinions were held, are responsible for the politicization of monetary policy decision making and the decisions that have led to the complete erosion of the value of the rupee and the standards of living.
Every life that is lost without essential medicines, every life lost in a queue and every life lost in the future due to the sheer mismanagement of the economy is because of the Rajapaksas and their appointed officials.
