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At last, the Governor of Central Bank and his team of experts have come to realize the truth that excess money supply, either through printing currency or reducing interest rates, in the name of providing adequate liquidity to maintain aggregate demand in times of economic depression, has only a limited use. In general terms, the traditional tools of monetary policy have lost their bite long ago, when money itself has undergone a revolution in identity. With the onset of globalization, spurred by financialization of economic activities and facilitated by the electronic revolution in money market transactions, central banks have become virtually an anachronism. When an institution that is supposed to manage a country’s money supply, finds it difficult to define and identify what money is how could that institution control money supply? Even then, with its limited capacity to manage that supply and monitor money market activities, it can at least use its constitutionally accorded independence, to neutralize the damaging impacts of politically motivated economic policies of governments in power. When a central bank mortgages that independence and act as another administrative arm to carry out the diktats of an executive power then that bank loses its credibility also. This has what happened in the case of the Central Bank of Sri Lanka (CBSL).
One should not forget in this context, the so-called discussion that CBSL governor and his colleagues had with President Gotabaya Rajapaksa (GR) soon after the present governor of the bank was appointed. The President was pointedly virtually dictating to the monetary authorities to assist in implementing “my”, i.e., GR’s economic policies. On that day, CBSL virtually lost its independence and literally became government’s bank. The pandemic provided a good opportunity to demonstrate its cooperation with GR and CBSL went to the printing machine and worked overtime to flood the market with currency. The inflationary effect of this exercise was casually ignored or deliberately minimized by subtracting food inflation from calculation. Expenditure on food consumes the largest percentage in the income of a vast majority of ordinary householders. The exclusion of this item in the calculation of inflation is to camouflage the truth. Moreover, investors know that the interest they earn on their bank deposits is lower than the prevailing inflation rate, and they will therefore park their savings beyond the reach of tax authorities. This means growth of a black economy. Didn’t CBSL itself encourage earlier owners of ill-gotten wealth lying abroad to be brought in without questions being asked?
One should not forget in this context, the so-called discussion that CBSL governor and his colleagues had with President Gotabaya Rajapaksa (GR) soon after the present governor of the bank was appointed. The President was pointedly virtually dictating to the monetary authorities to assist in implementing “my”, i.e., GR’s economic policies. On that day, CBSL virtually lost its independence and literally became government’s bank. The pandemic provided a good opportunity to demonstrate its cooperation with GR and CBSL went to the printing machine and worked overtime to flood the market with currency. The inflationary effect of this exercise was casually ignored or deliberately minimized by subtracting food inflation from calculation. Expenditure on food consumes the largest percentage in the income of a vast majority of ordinary householders. The exclusion of this item in the calculation of inflation is to camouflage the truth. Moreover, investors know that the interest they earn on their bank deposits is lower than the prevailing inflation rate, and they will therefore park their savings beyond the reach of tax authorities. This means growth of a black economy. Didn’t CBSL itself encourage earlier owners of ill-gotten wealth lying abroad to be brought in without questions being asked?
