With great power, should come great accountability

The DDO (Domestic Debt Optimisation) efforts have been successful. While the devils in the details remain, for the most part, everyone including the market, indicates that there is consensus on it being a success. While this may be a premature celebration, it is a celebration nevertheless for an institution that was behind and will remain the custodian of the Sri Lankan economy – and by extension the current crisis in it. 

This is by mandate, and only coloured by the circumstances. Therefore, when the mandate changes, to strengthen an institution to better work towards the people it serves, this power should not go unchecked.

The Central Bank continues to use its discretionary powers and lax regulations to cause instability, as its Western counterparts time and time again demonstrate, it must be held accountable. If the President, the Minister of Finance, and the ruling party back the governing boards, they may be able to get away with anything. This is what some economists argue the Central Bank bill sets out to do. 

The Parliament’s Committee on Public Enterprise lacks the expertise and authority necessary to investigate and hold CBSL responsible for its mistakes. Several appointments, including deputy governors, may be made by the political establishment under this contentious draft law, which, unlike the current law, had several elements rightfully ruled down by the Supreme Court. This is in keeping with international best practices. No member of the governing board or the monetary policy board is subject to punishment if things go south. 

In some countries, the Governor must resign for failing to achieve goals. This is necessary when certain wrong decisions, are more accurately characterised as lazy, flippant, and irresponsible decisions, with serious repercussions. Some central banks, like the one in Canada, have addressed the issue by forming a selection committee and a succession plan prior to the retirement or firing of incumbent central bank members. Moreover, the new monetary legislation draft allows the central bank to concurrently pursue a confusing array of objectives and de facto targets. Exchange rate policy targets an exchange rate, and monetary policy involves printing money to lower interest rates. While implementing the exchange rate policy, the central bank shall also consider the stabilisation of output towards its potential level. The central bank will have an explicit inflation target as one of its main goals in addition to targeting the output gap – also known as real GDP targeting; nevertheless, this necessitates giving up exchange rate control in addition.

Also, Keynesian central bankers can suppress rates for a longer time and cause monetary instability when their inflation aim is high. This is on top of an inflation target mandate that is as unsuccessful as it is conflicting with the aforementioned GDP and exchange rate targets. There are worries that instead of the more stringent 2% target used in more stable nations in West and East Asia, Sri Lanka’s parliament will grant the Central Bank goal independence and rubber stamp a 4-6% inflation target, under which the country was repeatedly driven into currency crises and sovereign default. While solutions on the other end of the spectrum, such as implementing a currency board or dollarisation, are too stringent, this legal guidance proposed for this is far too relaxed.

Despite the chaos such activities have produced, especially in the recent past when many currency crises were sparked, there is a layer of impunity added. The Central Bank and its offices are not subject to penalties for inducing foreign currency shortages through inflationary open market activities to compel rate decreases. There are no penalties for intentionally keeping interest rates low for extended periods of time and then abruptly raising them after causing external volatility, driving rates up to high levels, and causing bank bad loans. There are no penalties for permanently depreciating the flexible exchange rate, which is used to force individuals who have just managed to escape poverty back into it, nor are there repercussions for what this Central Bank has done in the present or previous crises.