The Central Bank Vs. Its Critics

By Hema Senanayake –May 6, 2016 

Hema Senanayake

Dr. W.A. Wijewardena pointed out that the Central Bank of Sri Lanka (CBSL) made losses in the year 2015. In a recent article, former deputy Governor of Central Bank Dr. W.A. Wijewardena insisted that such losses made by the Central Bank are economic landmines that could explode at any time. Should I agree or should I disagree with his assertion?

First, I do not agree with the present wisdom of CBSL including its Board known as Monetary Board. If economy is broken and is not functioning well and the currency is not stable then do not blame P.M or President, instead put the blame on the Central Bank. If it is not sufficient then blame the P.M., President and other elected officials for not running the Central Bank properly. Having said that, I also would say that I do not agree with the said assertion of Dr. Wijewardena.

I always do appreciate Dr. Wijewardena’s writings. Unlike us who happened to be macroeconomic analysts, Dr. Wijewardena being a former Deputy Governor of CBSL knows in and out of central banking. Yet, if he makes an inaccurate analysis the CBSL could take the upper hand in rejecting not only his comments but also others’ views too. This would be a dangerous development. Therefore our criticism must be fair and must guide political authorities to perform their job properly.

The Central Bank is a peculiar organization. It makes operational losses but still transfer profits to the government. Can any business entity do this? Dr. Wijewardena commented on this situation as follows:

“The loss in 2013 was followed by a comprehensive loss of Rs. 22 billion in 2014, but the accounts of the bank for 2014 showed that the Monetary Board had made an interim profit transfer of Rs. 8.5 billion to the Government out of these losses. An institution making losses can pay dividends to shareholders only by running down its capital and that was exactly what the Monetary Board had done in the two years concerned.” (Colombo Telegraph, May 03, 2016)

The Central Bank has responded to Dr. Wijewardena and he wrote about it as follows:

“The Monetary Board apparently did not take this comment kindly and caused its operational arm – the Central Bank – to issue a statement disputing this writer. The Board had argued in its wisdom that there was nothing wrong in the Bank making losses because central banks are not supposed to make profits and it would be imprudent for a financial institution to have a capital base covering 100% of its domestic assets.” (Wijewardena, CT, May 03, 2016)

Dr. Wijewardena questioned about the Central Bank’s capital and its depletion due to losses and the Central Bank responded saying that there was nothing wrong in the Bank making losses because central banks are not supposed to make profits and it would be imprudent for a financial institution to have a capital base covering 100% of its domestic assets.”

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