ECONOMYNEXT – Sri Lanka’s Central Bank Governor Indrajit Coomaraswamy is a ‘good soul’ Finance Minister Ravi Karunanayake said, in the wake of rising concerns that the independence of the monetary authority was being undermined.
“There are two people in the central bank – not the Governor, he is a good soul – but he is being led by two cronies who are basically running the wrong way,” Finance Minister Ravi Karunanayake told reporters Thursday.
He said the names of ‘two or three cronies’ of the central bank governor Nivard Cabraal under the ousted Rajapaksa regime would be revealed in a few days.
Last week Minister Karunanayake said Coomaraswamy was an ‘attendant’ during the last regime when the economy was pushed into the Intensive Care Unit.
Coomaraswamy, a person who is highly respected for his integrity and technical expertise, had earlier said that the economy had now come out of intensive care but was still in hospital.
Coomaraswamy who replaced Arjuna Mahendran last year, has taken action to clean up the Central Bank which got into a controversy over rigging of bond auctions and dumping pumped up securities on the Employees Provident Fund during 2015 and 2016.
The rupee also collapsed in 2015 as money was printed for finance the deficit and bring down rates driving the country to an International Monetary Fund bailout.
Karunanayake said Sri Lanka’s rupee would stabilize soon.
In January the aggregate excess balance of the commercial banking system rose to over 100 billion rupees as the tens of billions of rupees were printed to repay a maturing bond.
The move can further undermine the rupee, as the newly minted money hits forex markets as imports, analysts say.
When large volumes of money is printed, the central bank then has to sell rupees and lose forex reserves to keep the rupee from falling or allow the rupee to fall to safeguard reserves and push inflation up.
Analysts say comprehensive reforms to the central bank law are needed to prevent the Treasury from forcing the central bank to repay maturing bonds with printed money.
The current law also allows the Treasury to demand so-called provisional advance – a type printed money overdraft – which is another source of economic instability.
Central Bank has scrambled to mop up the rupees and prevent further damage to the rupee, over the last few days, which analysts say shows that fiscal dominance is at work.
On Wednesday the central bank called bids to sell up to 15 billion rupees of short term Treasuries in its portfolio but there were no takers. But most analysts expect some of its Treasuries holdings to be trimmed at this week’s auction after rates went up.
Sri Lanka has a de facto peg with the US dollar, but due to sudden surges of money printing, mainly to finance spikes in budget deficits, the rupee collapses and inflation goes up.
The central bank itself can contribute to balance of payments crises by sterilizing interventions (filling liquidity shortages after intervening in forex markets) to keep rates low and purchasing dollar inflows from the Treasury to prevent the rupee from going back up.
Sri Lanka’s policy rates are more than 10 times that of the US and analysts say it will be an easy to task to keep a strong peg, if the tendency by authorities to repay bonds and Treasury bills with printed money and make so called provisional advances, are resisted.
Currencies of so-called soft-pegged countries break because excess domestic money is injected to the banking system, either through policy rate windows, open market operations to sterilize forex market interventions, advances to the Treasury or bank bailouts. (Colombo/Jan12/2016)