Former Deputy Governor responds to Central Bank

• Former Deputy Governor of the Central Bank P. Samarasiri has sent in the following statement:

I refer to the CB’s press release, dated 12 October 2018, on the above title issued in response to my article titled “Excessive Currency Depreciation: Both currency and public lose”, published in the Daily FT 11 October 2018, and wish to provide my response as follows in the public interest.

At first glance, I felt extremely sorry for the pathetic plight of those so-called professional and technically competent CB officials who provided a “yanne koheda? malle pol” answer/response to me, possibly due to their poor track record of fitness and propriety. My article published in the Daily FT covered 12 points-based views on certain official statements of the CB officials on the present currency depreciation. However, the CB’s response hastily covered only one evading paragraph, on an entirely different point, by missing or neglecting all my points.

I thought that the respective CB officials would professionally and technically study my points, or at least the stated sections of the Monetary Law Act (MLA), and respond with public accountability, especially since I had published two detailed articles in the Daily News-Economic Insights-on 19-20 September and 3-5 October on this subject, covering similar views and policy options proposed.

By reading the CB’s response, the public will know the poor quality of those CB officials, to respond to a recently-retired Deputy Governor like me, who was in the CB service for an uninterrupted 35 years. Such a response is not surprising to me as those officials (in the new policy regime) have started targeting (like flexible inflation targeting) policy allegations, supported by various insider power-based actions, against former Governors, who were led by the same officials with pope-like-loyalty, and granted them double-quick promotions and frequent travels and assignments world over, where some of those officials even cried emphatically at the time of the departure of some Governors from the CB.

Such “yanne koheda? malle pol” answers from the CB are not strangers to me. In my 35 years supervisory career in the CB (with an uninterrupted seven-and-a-half years attending the Monetary Board meetings), I used to guide officers to write reports focusing only on the relevant points directly, with supported evidence/facts on record and duly verified, while refraining from the supply of irrelevant information, given the risks of such irrelevant information getting into public scrutiny at times, inclusive of unlawful leakages from the CB, which could cause enormous difficulties to the CB and the country. I recall substantially commenting on and editing such reports that came to me with closed-eyed-initials of signatures, from all the top brass of the present CB regime. I am sure they will recall it, if they have even a faint professional integrity to the CB now, in the new regime. I was present when the former Governor A S Jayawardena responded furiously, “it is another yanne koheda, malle pol answer” to a very senior CB officer. I saw many Governors responding in the same gestures to reports that were submitted to them.

However, the public has now got a new set of information on the monetary policy process from the CB’s response. As the monetary policy is a public policy which impacts the public to an unusual degree, as well-proved from the present currency depreciation in Sri Lanka and the world over, the public has the right to know the accountability of the new monetary policy process referred to in the CB’s response, especially because its language appears to lead the public to believe that they can exclusively depend on the CB’s model-based monetary policy in future, to stabilise their economic activities and living standards, despite current excessive rupee depreciation in violation of the MLA.

The public, including me, have been inquiring on the treatments to cure the hospitalised patient, the economy, suffering from the excessive currency depreciation ailment.  In contrast, the CB in its response talks about the improvements being made to the hospital (monetary policy decision-making process/framework) without duly treating the patient with drugs already available at the hospital. Therefore, it is time to do quality assurance tests on the hospital - whether it has all facilities inclusive of intensive care units to cure the same patient in future at least. In this context, I request the CB to provide the public with non-misleading/leading information listed below on the CB’s new monetary policy hospital – the new model-based flexible inflation targeting monetary policy process. Then, I too can update my awareness since 19 August 2017 (my retirement date) and write to the public comprehensively, for better discussion on improvements to this public hospital. 

Whether the Monetary Board has approved the monetary policy process (referred to as macroeconomic modelling and forecasting, which have made the process of monetary policy decision-making evidence based and forward looking).

Whether the Monetary Board is presented with results of such modelling and forecasting of all relevant macroeconomic variables to make its monetary policy decisions (God bless the Monetary Board).

What are the estimated relationships between the monetary policy and relevant macroeconomic variables estimated in the model, and are they statistically significant to make policy decisions?

What are the deviations between the model-based results (or recommendations) and final monetary policy decisions?

Is the flexible inflation target of 4-6% or single digit is derived from the above model for the purposes of the monetary policy as set out in the MLA?

Are the CB’s policy interest rates for overnight inter-bank market highly correlated with the inflation measure used by the CB, and what is that inflation-tracking measure used by the CB for the economy?

Is the economic growth stated by the CB is statistically correlated with the monetary policy, and what is the target of the economic growth consistent with the flexible inflation target of 4-6% or single digit?

Why has the CB failed to forecast this excessive currency depreciation, which is a monetary phenomenon, i.e., the value of currency in terms of foreign goods and services or international stability of the rupee, as stipulated in the MLA, even after wide communications by the US Fed for its monetary policy on the US dollar during the past three years?

What is the exchange rate that is considered to be stabilised or recommended by the CB to the public, without intervention from the foreign reserve and being consistent with the underlying trends in the country, to be competitive for exports and domestic economy as per the model-based monetary policy process?

Is the model capable of removing the statistical base effect in inflation forecasts referred to in the CB’s monetary policy press release 02 October 2018? Have the terms, i.e., near-term, medium-term and long-term, been specified in the model, given their importance for making business decisions of the public and the Government in terms of the CB’s forecasts and projections of inflation?

Has the model-based process including internal controls relating to information reporting and results been audited/validated by the Auditor General and Internal Auditor, or at least by a reputed third party like the IMF/World Bank? If so, is the audit report made available to the public?

Has the information (statistics given in the table and charts) released in the CB’s response dated 10 October 2018 in the Daily FT been audited and confirmed under internal controls in normal institutional governance, and are those variables statistically significant to establish the correlation with the exchange rate depreciation in the present model-based monetary policy process?

Were the forecasts/expectations announced in the CB’s press releases dated 5 March 2018 on the interest rates in the near-term and dated 16 May 2018 on the foreign reserve by mid-June the results of the said monetary policy process as targets and forecasts of interest rates and CB’s foreign reserves are essential elements of the monetary policy in terms of the MLA?

Can the monetary policy press releases be improved to inform the public of the model-based economic forecasts of relevant variables to guide and lead the public, similar to what the US Fed does, rather than judgmental expectations of the CB?

Whether the CB is prepared to cut its research staff, since the new technology-based monetary policy requires fewer human hours, given that successful models are generally online with data sources and results/policy recommendations?

What are the yardsticks used by the CB to normally label economic views of the members of the public as misleading the public, while only the views of the CB officials are leading the public, given the fact that economic views are diverse (economists are two-handed) and all economic decisions are debatable, as they are not rocket science and those CB officials are not angels?

I also request the Honourable Minister of Finance and the Honourable Auditor General to make arrangements in terms of the MLA and the Constitution to audit the framework, policy efficiency/effectiveness, internal controls and value for money of the CB-stated-model-based monetary policy process, to ensure that it delivers public economic wellbeing as envisaged in the MLA. I made an official request in 2017 to the Monetary Board to arrange to audit CB’s key economic data, as those are used for making nationally important public policy decisions. Nearly one-and-a-half years - already elapsed - could be adequate to commence it. The conduct of a public policy like the monetary policy must be ensured with publicly accountable prudence, as money-printing could be unaudited model-based now, similar to investments in Quant-Funds, which may cause economic catastrophes and heavy losses to the public, as reported from many countries including Sri Lanka.

I hope that the CB will provide focused answers to the above list with the approval of the Monetary Board (as the Monetary Board is responsible for both the hospital and treatments under the MLA). The list does not contain any market-sensitive information relating to financial dealings or specifically identified parties prohibited under the MLA, other than aggregate macro information that the public has the right to know in the spirit of Section 25(1) of the MLA. Such information will educate the public on the accountability framework of the CB, and save the CB from possible public litigations in the event of model-based monetary policy errors and negligence, possibly from those officials or technical failures of the models. It is also proposed to release the new model to lead the public on their economic decisions and inflation forecasts in line with the CB’s monetary policy, as the model-building inclusive of foreign training could have involved in public funds.

I hope that the public will welcome my suggestions as above, that will help prevent frequent allegation on CB’s data and policy decisions that even the present CB itself makes in respect of past Governors, despite same CB top-brass today led those past Governors.

(The writer is a recently retired public servant as a Deputy Governor of the CB supervising the financial sector, and a Chairman and a Member of several Public Boards who also served as the Director of Bank Supervision and the Secretary to the Monetary Board in the CB. He has authored several economics and financial books and articles covering this subject.)