W.A. Wijewardena retired from the Central Bank of Sri Lanka as its Deputy Governor in 2009 and has been functioning as an independent economist since then.
This interview has been edited lightly.
Your book “Central Banking: Challenges and Prospects” has just been published. Would you tell us a little bit about it?
It contains 20 articles which I have penned over a decade and published in various publications on central banking. When they were presented in book form, they were updated to reflect the current situation. The book has analyzed the current issues on central banking relating to their vision, mission, independence, governance and political subjugation, etc. The book argues with historical examples in Sri Lanka and elsewhere that central banks should pursue consistently their main mandate, namely, price stability and if financial sector stability has been made a subject, the co-objective of price stability and financial system stability.
It points to the fact that the trust which people place on central banks comes from the banks’ ability to satisfy the demand for maintaining stable prices and stable financial systems. An important message given in the book is that central banks should not seek to beat the markets by adopting contrary policies because when markets start reacting, no central bank or government could stop the economic and financial catastrophe that would hit the economies concerned. The East Asian financial crisis of 1997-98 and the global financial crisis of 2007-8 are good examples. In the first case, the Bank of Thailand’s stubborn attempt at maintaining the Baht rate at 25 Baht per dollar, when the markets demanded otherwise, was the trigger point of the crisis. In the latter case, the Federal Reserve’s unsound low-interest-rate policy to house the Americans created ground conditions for the subsequent global financial meltdown. The message is that central banks should be wiser when they design policies.
What are a couple key points that you hope will resonate with Sri Lankan policymakers?
One is that the government should start upgrading and reforming the central bank to reflect the world’s best practices of central banking. Sri Lanka’s central bank was set up in 1950 based on the wisdom of central banking that prevailed at that time. The law has been amended from time to time, but they were just piecemeal reforms. Today, it is necessary to make comprehensive central banking reform.
The other is that the Ministry of Finance should cooperate with the central bank to maintain price stability by adopting a compatible fiscal policy. If the government adopts contrary policies, the monetary policy being pursued by the central bank becomes weakened. This possibility should be avoided at all costs, since, in such an event, it is the economy that would suffer.
In terms of economic policy recommendations, what are a few steps you’d encourage Colombo to take in the near-term?
Obviously, the budget consolidation program should be sped up so that, with a budget that is under control, the central bank could attain its objectives more speedily. Today, the budget imbalance has forced the central bank to finance the budget by sacrificing monetary policy objectives. Hence, the proposed inflation targeting framework by the central bank should be introduced as quickly as possible.
Since Maithripala Sirisena became president in January 2015, how would you describe Colombo’s performance vis-à-vis economic policy?
Economic performance has not been impressive as many had expected. In fact, an economic slowdown had started since about 2013, long before President Sirisena was voted to power. However, the government has not been able to reverse the declining trend. The important economic reforms had been postponed at the cost of long-term economic growth which has been estimated, as the required rate, at or above 7% per annum. The actual realization had been below 5% and, according to [the International Monetary Fund] IMF, the same trend will prevail until about 2020. The year 2017, with a projected growth of less than 4%, is a complete write-off. What it means is that urgent action should be taken to arrest the situation and push growth forward.
Do you have a writing routine?
Yes, I write continuously. I have a weekly column in the country’s leading business daily, The Daily FT, and publish scholarly articles in various journals.
What do you read for fun?
Everything that I can lay my hands on from fiction to serious writings. The range covers economics, history, popular science, religion, etc.
About how many books do you read per year?
Many, and I cannot give a numerical figure. Maybe about 10 to 12.
What’s the best book you’ve read this year?
That is, Oxford academic Peter Frankopan’s “The Silk Roads: A New History of the World” – which is a representation of world history in terms of battles among nations or ethnic groups for economic supremacy in the world. The title Silk Roads is a metaphor because it is through the Silk Road that goods were shifted from one place to another for more than 2000 years, enabling the nations on the road to learn from each other and shifting their religious and spiritual leanings from one to another. But Frankopan has covered the exchange of goods for more than 10,000 years and chosen to call them Silks Roads of a different kind. The beauty of the book is that such exchanges that have taken place in history have not been purely economic. They were political, military and religious in object, content and coverage. So, what we observe in global trade today had been there for thousands of years in the same vigor and rigor.