Confidence is key at Central Bank

It is no secret that the Central Bank of Sri Lanka has suffered a severe erosion of confidence over the past decade. Instead of being an independent institution run by individuals with the highest levels of integrity, it has suffered the scourge of politicisation that has afflicted almost all State institutions in the country.

The Arjuna Mahendran Treasury bond saga cost the UNP-led Coalition Government legitimacy and longevity. Soon after that debacle, President Maithripala Sirisena quite wisely picked Dr. Indrajit Coomaraswamy for the job of Central Bank Governor in order to restore much-needed confidence in the financial regulator. Dr. Coomaraswamy’s impeccable credentials and integrity allowed for the Central Bank to enjoy a renaissance of independence and professionalism for a few brief moments.

Last week, SLPP MP and State Minister Ajith Nivard Cabraal resigned his parliamentary seat to be reappointed as head of the Central Bank of Sri Lanka. It was a position he had held for nearly nine years when President Mahinda Rajapaksa was President. Having taken over as Governor at a critical juncture in Sri Lanka’s economy, it is imperative that the new Governor instils the same sense of confidence in the Central Bank in order to ensure the stability of the financial system when the country is on the brink of economic disaster.

The apex institution that sets monetary policy for the country must be trusted not only the financial sector. It must also win the confidence of the public. It is only when there is such stability in the financial sector that there could be any hope of confidence in the economy. Investments will flow into the important sectors where there are clear monetary policies and a sense of predictability and stability.

The recent Governor appointment itself raised many questions regarding the independence of the Central Bank and potential conflicts of interest regarding a member of a political party taking up the post. The matter is now before the courts of law. It is therefore incumbent upon Governor Cabraal to employ extra cautiousness during his transition back into the high post.

Unfortunately, some initial decisions have proved disappointing. Within days of the appointment, K.M.A.N. Daulagala has been removed from her post as the Secretary to the Monetary Board. There are many reasons to change staff during a transition and the Governor is well within his rights to do so. However, in an institution such as the Central Bank which has a serious credibility problem, optics matter. 

As the Secretary to the Monetary Board, Doulagala was entrusted with numerous investigations, including five forensic audits into bond transactions during the past decade. These include the now-infamous 2015 bond issue under Arjuna Mahendran and also several bond issues that took place the last time Governor Cabraal held office between 2006 and 2015. These investigations have provided information to the Presidential Commission and to investigations carried out by the Attorney General into the bond scam. 

According to reports, Daulagala had also spearheaded several audits into high profile financial companies that were politically linked. The removal of such an experienced officer raises serious questions, so soon after a major change at the helm of the Central Bank. There is a genuine concern whether this sudden removal of the Secretary to the Monetary Board will have an impact on future investigations into bond transactions.

It is imperative that the new Governor does everything in his power to address the credibility gap within the institution he heads. He must rise above his own complicated history as Governor of the institution and prove to his critics that he can be trusted to lead Sri Lanka’s financial regulator through this economic crisis.