Central Bank’s ‘Devil’s Alternative’ to inflation targeting

Whatever you do, it will harm people

- By W.A. Wijewardena

President and Finance Minister Anura Kumara Dissanayake Central Bank Governor Dr. Nandalal Weerasinghe

THE Devil's Alternative is the title of a thriller by bestselling author Frederic Forsyth published in 1979 which coined the phrase 'devil's alternative' that at one stage, you reach a state in which whatever you do, it will harm others [1]. When I watched the recent non-conclusive between Central Bank officials and Parliament’s standing Committee On Public Finance or COPF [2], it appeared to me that the present Central Bank is caught up in a choice similar to a devil’s alternative in the exercise of its new monetary policy framework inflation targeting mandated to it by the new Central Bank Act or CBA.

Prior to the enactment of the CBA, an amendment made to the now repealed Monetary Law Act (MLA) in 2002 mandated the Central Bank to simultaneously attain two co-goals, economic and price stability and financial system stability. As I have explained elsewhere, the addition of the intruding term 'economic' to elaborate what is meant by 'price stability' was the fine work of the then Governor of the Bank, the late A.S. Jayawardena [3].

When Jayawardena was confronted by experts on the subject, including the then IMF Resident Representative in Sri Lanka, Dr Nadeem ul Haque, for an explanation about this peculiar way of defining price stability, his answer was based on the overall stability of the macroeconomy and not just stabilising a price index.