CBSL under a new Governor: Balancing act becomes key amidst crisis

• Printing more rupees will add to economic crisis
• Short-term roadmap for stability due next week

By Yoshitha Perera

Economists forecast that the Central Bank of Sri Lanka (CBSL) will likely expand the country’s money supply in the upcoming months due to higher government borrowings. This comes as the timeline for a short-term roadmap to ensure economic and financial stability by newly appointed CBSL Governor Ajith Nivard Cabraal approaches its end in the first week of October.

In this backdrop, the Cabinet of Ministers also approved the proposal submitted by Minister of Finance Basil Rajapaksa on 22 September to increase the credit limit for the year 2021 by a further Rs. 400 billion, bringing the overall browning limit to Rs. 3.3 trillion.

Speaking to The Sunday Morning, senior economist and former CBSL Deputy Governor Dr. W.A. Wijewardena said that government borrowings had increased, and during the last 18-month period (January 2020-July 2021), the total amount of government borrowings from the banking sector amounted to Rs. 2,800 billion.

“This situation has created a huge increase in money supply. There is no choice for the Government but to move for further monetary expansion due to the present financial situation,” he said.

Dr. Wijewardena said the situation would compel the new CBSL Governor to move along with the present policy package that was started by former CBSL Governor Prof. W.D. Lakshman.

“Even if Prof. Lakshman is not serving in his position at the Central Bank, the new Governor has to follow his procedures. We are not expecting any drastic changes in the roadmap that will be presented by the new Governor in the first week of October,” he said.

Explaining the ongoing printing of money, Dr. Wijewardena claimed that the Government was narrowing down the focus of the issue to the physical notes and coins issued by CBSL, adding that, however, it is just one component of the total money stock in the country.

“The total money stock of the country includes several components such as notes and coins issued by CBSL, the balances in people’s accounts in commercial banks, the savings and fixed deposit balances in commercial banks, and also 50% of the NRFC (non-resident foreign currency) accounts. So, money printing does not only refer to the coins and notes issued by the CBSL in its transaction with the Government; the foremost component we have to focus on is the increase in money stock,” he said.

He said that according to the latest available data at the CBSL, the Government’s debt stock increased by Rs. 2.7 trillion and money printing had gone up by 35% over the last 18-month period.

“The CBSL had printed money soon after the new Governor assumed office, but it was a minuscule amount of money. What we have to be concerned about is the total amount of money being printed having gone up by 35%,” he said.

“The money multiplier during this Government’s tenure has increased from Rs. 8 to Rs. 10. This means that every rupee printed by the CBSL leads to an additional creation of Rs. 8 in the financial sector, and now, that amount has increased to Rs. 10. Due to this situation, there will be high inflation in the country in the future, and Governor Cabraal has to focus on these issues when preparing his roadmap,” Dr. Wijewardena said.

Dr. Wijewardena forecasted that the country’s external debt commitment during the next 12 months would amount to about $ 6.9 billion, while the country needs a lot of foreign exchange to continue imports.

FR petitions against Cabraal’s appointment

Meanwhile, the Samagi Jana Balawegya (SJB) last Wednesday (22) filed two fundamental rights (FR) petitions before the Supreme Court of Sri Lanka against the appointment of former State Minister Cabraal as Governor of CBSL.

The two petitions were filed by SJB General Secretary MP Ranjith Madduma Bandara and SJB MP Manusha Nanayakkara. The petitioners named five respondents including the Attorney General (AG), Minister of Finance Basil Rajapaksa, the CBSL Monetary Board, CBSL Governor Cabraal, and President’s Secretary Dr. P.B. Jayasundera.

The petitioners highlighted the forensic audit into the affairs of the Central Bank for the period of 1 January 2009 to 31 December 2017, in respect of the issuance of Treasury bonds and other matters, which was recommended by the Presidential Commission of Inquiry (PCoI) appointed by then President Maithripala Sirisena to investigate, inquire, and report on the issuance of Treasury bonds for the period of 1 February 2015 to 31 March 2016.

Accordingly, the Monetary Board of CBSL retained the services of BDO India LLP to conduct the said forensic audit. The mandate of BDO India LLP was “to inquire and examine the conduct of regulatory and supervisory roles by the Superintendent of Public Debt/Director and supervision of non-bank financial institutions pertaining to selected primary dealers for the period of 1 January 2009 to 31 December 2017”.

The petitioners stated that the role of the third respondent, Cabraal, during part of his previous tenure in office as Governor of CBSL, was also subjected to the said forensic audit.

The petitioners also alleged that short-sighted, hasty, and haphazard decisions made by the third respondent during his tenure in office as the Governor, by merely acting as a rubber stamp of the political authority, without making calculated decisions with a foresight and proper financial risk analysis in connection with the high-profile case of Imaad Shah Zuberi, caused the Government of Sri Lanka and the country a loss of approximately $ 6.5 million.

Thereby, the petitioners sought a court order declaring the appointment of Cabraal as CBSL Governor null and void.

Government’s response

Speaking to The Sunday Morning, CBSL Director – Communications M.S.K. Dharmawardena confirmed that Cabraal would present the roadmap during the first week of October.

Several attempts to contact the CBSL Deputy Governors for further insights into the plan proved futile.

Cabraal last week assured that he would present a fresh economic stability roadmap during the first week of October, which would include plans to reduce money printing, with the goal of restoring trust among key stakeholders and market participants.

“In the coming days, we will release a roadmap that will take into account the many stakeholders and their expectations, so that we can provide them with clear guidance on how they should proceed during these turbulent times,” Cabraal said.