There are claims being made that Sri Lanka’s central bank which had acted with impunity for 70 years destroying the currency from Rs4.70 to the US dollar to Rs360 and expropriating savings and decimating real salaries of the poor, will be made magically ‘accountable’ under a monetary law.
Far from being accountable in Sri Lanka and other third-world countries where vast populations are impoverished through flexible exchange rate/ flexible inflation targeting style policies and their peers, central banks also enjoy impunity.
What is being accountable? Is being accountable giving excuses for generating high inflation and not giving even an excuse for depreciating the currency and imposing regressive inflation taxes on the poor?
The central bank through this law is seeking to target output (print money for growth) despite the havoc it has caused in Sri Lanka since 2015 triggering multiple currency crises.
It is also seeking to simultaneously operate money and exchange policies, the problem that has dogged this country for 73 years and led to forex shortages.
According to the draft law, the central bank is free to print money to boost growth and depreciate the currency pretty much as it had done in the past.
The following provisions are for the “Autonomy and accountability of the Central Bank”:
“The Central Bank shall be autonomous and accountable as provided for in this Act
(3) The autonomy of the Central Bank shall be respected at all times and no person or entity shall cause any influence on the Governor of the Central Bank or other members of the Governing Board and Monetary Policy Board or employees of the Central Bank in the exercise, performance and discharge of their powers, duties and functions under this Act or interfere with the activities of the Central Bank
4) Except in the exercise, performance and discharge of the powers, duties and functions under this Act, the Governor of the Central Bank or other members of the Governing Board and Monetary Policy Board, employees of the Central Bank or any person authorized by the Central Bank shall not seek or take instructions from any person:
The following is also listed to boost accountability that is promised by the new law:
RELATIONSHIP WITH THE PARLIAMENT, THE GOVERNMENT AND THE PUBLIC
- (1) The Central Bank shall, once in every six months and at such additional times as it deems necessary, inform the public regarding the implementation of its monetary policy, and the achievement of its objectives.
(2) The Governor of the Central Bank may, at the request of the Parliament or on his own initiative, be heard by the Parliament or any of its committees periodically, regarding the functions of the Central Bank.
(3) The Central Bank shall, within a period of four months after the close of each financial year, publish, and lay before the Parliament through the Minister, a report approved by the Governing Board, on the state of the economy during such financial year emphasizing its policy objectives and the condition of the financial system. The report shall include a review and an assessment of the policies of the Central Bank followed during such financial year.
No Sanctions?
There are no sanctions on the Central Bank or its officers for creating forex shortages through inflationary open market operations. There are no sanctions for keeping interest rates artificially low for long periods and suddenly hiking them after triggering external instability and triggering bad loans in banks. There are no sanctions for pushing people barely out of poverty back into poverty through permanent depreciation of the flexible exchange rate or 5% inflation targeting.
For what Sri Lanka’s Central Bank has done, in the recent crises or in the past, there is no punishment. No one can be punished by law for destroying the currency, the bank deposits or the salaries of the people or driving the economy into repeated currency crises. It is not accountability, it is impunity.
A central bank an SOE like no other through its exchange controls, has absolute control over the lives of citizens. When import and price controls are added the tools for absolute totalitarian control are available to bureaucrats and politicians. Price controls and rationing, are also a knee-jerk reaction to aggressive monetary policy for growth. Under active monetary policy, these have become commonplace in Sri Lanka.
The Central Bank is like no other SOE or regulator in another way. It is a cardinal principle in regulation that the producer of goods or services is separate from the regulation. But in the case of Central Banks, the regulator is the very agency that produces bad money.
A Central Bank is like no other SOE, in that it can impose sanctions on the public and businesses through exchange control and its own monetary law or the banking law, after triggering forex shortages by over-producing money to suppress interest rates.
Under the principle of monetary law, anyone who produces a 500-rupee note is committing a crime. But the Central Bank which prints billions and triggers forex shortages and pushes millions into poverty through the flexible exchange rate, faces no sanctions and it is not a crime.
The perpetrator in fact is making its own law to give itself immunity. It is not just Sri Lanka but all third world Central Banks do that. The ‘First World’ central banks also did that at one time.
Germany had similar policies till the end of World War II when the Deutsch Mark was produced by the Bundesbank. In France, until Jacque Reuff produced the New Franc for de Gaulle in 1960 Sri Lanka-style forex shortages dogged the country, and in the UK until Thatcher and Alan Walters and Geoffrey.
However, in 1979, Sri Lanka and other third-world countries, the perpetrator of monetary instability has enormous powers not only for exchange controls but also to influence other agencies to control imports.
In this crisis, the Central Bank also barred forward contracts after printing money, in addition to controlling the exchange movements and trade. Central banks use these powers to engage in their favourite game in Sri Lanka and elsewhere – that is to delay market interest rates and continue to print money for another month or another year.
This is what classical economist Friedrich von Hayek, who got a Nobel prize in the 1970s shortly after the US dollar collapsed using the very policies that are to be legalized in the new law.
A Central Bank through its exchange controls, has absolute control over the lives of citizens. When import and price controls are added the tools for absolute totalitarian control are available to bureaucrats and politicians. Price controls and rationing, are also a knee-jerk reaction to aggressive monetary policy for growth. Under active monetary policy, these have become commonplace in Sri Lanka.
“And whoever controls all economic activity controls the means for all our ends, and must therefore decide which are to be satisfied and which not,” explained Friedrich von Hayek in the Road to Serfdom
“This is really the crux of the matter. Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower, in short, what men should believe and strive for.”
The worst among state economic controls are exchange controls.
Exchange controls were virtually invented by the Bank of Russia under Tsar.
If this new monetary law is worth the paper it is written on, if the architects of this law are so confident of the efficacy of the law, they should be prepared to immediately abolish exchange and import controls which were imposed after this state enterprise was set up
Nicholas in 1906. The country fell to Bolsheviks about a decade later. “The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges,” wrote Hayek.
“Nothing would at first seem to affect private life less than state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.”
The UK where the stimulus and interest rates suppression with exchange rate policy was mainstreamed by J M Keynes, had exchange controls from 1947 (a year after the Bank of England was nationalized) until 1979 when the country moved to tight single anchor monetary policy with a clean float.
The UK was in back-to-back IMF programs before that. With the last for 3.9 billion US dollars, the biggest loan at the time. Leaving aside the finer points of the legalized printing for stimulus and anchor conflicts that can lead to a default of Sri Lanka’s newly restructured debt, the ordinary citizen should demand only one thing.
Like the UK, US, Switzerland, Singapore or Hong Kong and Dubai, the public should demand the minimum from the economic bureaucrats.
If this new monetary law is worth the paper it is written on, if the architects of this law are so confident of the efficacy of the law, they should be prepared to immediately abolish exchange and import controls which were imposed after this state enterprise was set up. This is something the politicians and the people should demand from the SOE. If not, the new monetary law is not worth the paper it is written on