Economic development role of Central Bank under new Central Bank Act: Part I

CENTRAL banks have always been a puzzle to ordinary public as well as to politicians. For public, it is the institution which is charged with and holding responsibility for the country's economic growth and prosperity. I had sat on many interview boards, during my central bank days, to examine candidates who had sought to join the Central Bank as staff members. All of them had been the cream of the local as well as foreign universities holding either first classes or second-class upper division passes in the respective subject areas. One question which I posed to them was why they wanted to join the Central Bank. The answer just spat out of their mouths as if it had been kept well ingrained in their memory systems.

- By W.A. Wijewardena

The Central Bank is, according to them, the institution in charge of the country's economy deciding on and implementing the necessary economic policies to develop the country. Hence, by joining the Bank, they wanted to be a part of that management team and serve the country.

I do not blame them for holding that misconception because that was how they had been told by their teachers at schools and professors at universities. I recall a way back in early 1990s when we had organised a discussion session for the commerce schoolteachers who supplied monthly regional economic data to the Bank. There was a survey to assess their central bank literacy, and one question was the role they perceive for the Bank in the economy. Almost all had answered that the Central Bank was the institution in charge of the economy and its economic growth.

Politicians asking central banks to twist monetary policy

Politicians believe that it is the duty of the Central Bank to supply the needed money for the government to finance the budget so that the government could adopt policies to steer economic growth. This belief makes them desire the central bank to twist its monetary policy to support the government budgets which do not generate sufficient revenue to undertake the scale of expenditure planned by them.

This belief is equally shared by politicians of developed as well as developing countries. Even the President of the United States, the country viewed as highly developed, shares this view as openly expressed by the current incumbent to that position, Donald Trump. His conflict with the Chairman of the Federal Reserve Bank recently on this ground was analysed by me in another article in this series.¹