Central Bank does it again: Shoot the

messenger while ignoring the message

July 7, 2014
The heat-up of the debate on external debt sustainability is benefcial
The Central Ban has rene!ed the public debate on "ri #ana$s external
debt sustainability by issuin% a fresh clarifcation on 4 July throu%h its &ublic
'ebt 'epart(ent or &'' )a*ailable at
!!!+cbsl+%o*+l,pics-n-docs,latest-ne!s,press-20140704e+pdf.+ This is a
salutary de*elop(ent since in de(ocracies, the public has the ri%ht to
express their *ie!s freely on action taen by authorities and the authorities
ha*e a responsibility to clarify their position on the issues raised+
Those
!ho
ser*e
in
public authorities are not o!ners but trustees !ho hold their position in
trusteeship to the public+ This has been elo/uently portrayed in the openin%
pa%e of 01ahinda Chinthana2 3ision for the 4uture$ that 56 ruler is only a
te(porary trustee and not an o!ner of your children$s herita%e7+ Thus, the
current debate on the external debt sustainability in "ri #ana bet!een the
Central Ban 8 the authority !ho (ana%es the country$s (onetary policy
and external position in trusteeship 8 and the (e(bers of the public 8 the
benefactors !ho ha*e %i*en such trusteeship to the Central Ban 8 should
be *ie!ed as an essential in%redient in the de(ocratic !ay of (ana%in% a
country allo!in% freedo( of thou%ht and free discussion+
6 press release !ith so (any shortco(in%s
6 brief history of the current debate is as follo!s+ 9t arose as a conse/uence
of a &ress :elease issued by the Ban on 1; 1ay in !hich it infor(ed the
public that 0"ri #ana continues to i(pro*e on <=->"C6& para(eters re+
Country indebtedness$ )a*ailable at2
!!!+cbsl+%o*+l,pics-n-docs,02-prs,-docs,press,press-20140?1;e+doc.+
This &ress :elease had the follo!in% ob*ious shortco(in%s+ 4irst, it had
spoen of the i(pro*e(ent of the country$s external indebtedness but
based its clai(s on the central %o*ern(ent$s external debt and not on "ri
#ana$s external debt+
Those !ho ser*e in public authorities are not o!ners but trustees !ho hold
their position in trusteeship to the public+ This has been elo/uently
portrayed in the openin% pa%e of 01ahinda Chinthana2 3ision for the 4uture$
that 56 ruler is only a te(porary trustee and not an o!ner of your children$s
herita%e7+ Thus, the current debate on the external debt sustainability in "ri
#ana bet!een the Central Ban 8 the authority !ho (ana%es the country$s
(onetary policy and external position in trusteeship 8 and the (e(bers of
the public 8 the benefactors !ho ha*e %i*en such trusteeship to the Central
Ban 8 should be *ie!ed as an essential in%redient in the de(ocratic !ay
of (ana%in% a country allo!in% freedo( of thou%ht and free discussion7
"econd, it had clai(ed that the calculations had been (ade as
per the reco((endations found in the <=->"C6& 1anual on
>@ecti*e 'ebt 1ana%e(ent issued in 200A+ Bet, it had follo!ed
these reco((endations only partially+ Third, the data
presented in the &ress :elease !ere contradictory to !hat had
been published by the Central Ban in its 6nnual :eport for
201; raisin% doubts about their accuracy and reliability+
4ourth, the press release had assured the public that "ri #ana
does not face any external debt crisis since the calculations
done by usin% the central %o*ern(ent$s borro!in%s !ere all
!ithin acceptable ran%es+ Co!e*er, the picture !hich had
been presented in the 6nnual :eport indicated that 0"ri #ana$ !as (o*in%
to!ard the threshold of an i((inent debt crisis in the years to co(e+ 4ifth,
the press release had (ade its clai(s on the past data but any (eanin%ful
ris analysis should ha*e been (ade on the basis of the future
de*elop(ents relatin% to the pay(ent of the external debt by the country+
"ince these !ere serious issues, this !riter considered it a public ser*ice to
present the true picture and !arn the Central Ban of the undesirability of
bein% co(placent based on inco(plete analyses+ Cis inter*ention appeared
under the title 5"ri #ana$s >xternal 'ebt "ustainability2 Co(placence
based on inco(plete analysis (ay be the !orst ene(y7 )a*ailable at2
http2,,!!!+ft+l,2014,0?,2A,sri-lanas-external-debt-sustainability-
co(placency-based-on-inco(plete-analysis-(ay-be-the-!orst-ene(y, .+
1any enter the fray, an%erin% the Central Ban
The Central Ban$s &'' countered this !riter by the issue of a second press
release dated 1; June char%in% that this !riter and others !ho had follo!ed
hi( had not realised that the calculations !ere based on the Do*ern(ent$s
external debt position+ Co!e*er, the title of the pre*ious as !ell as the
current press release had clearly spoen of "ri #ana continuin% to i(pro*e
on the country indebtedness and not the Do*ern(ent$s external debt
indebtedness )a*ailable at2
!!!+cbsl+%o*+l,pics-n-docs,02-prs,-docs,press,press-20140A1;e+doc .+
6t this sta%e, t!o others actin% in public interest entered the fray, one a
le%islator !ho raised it in &arlia(ent )a*ailable at2
http2,,!!!+ft+l,2014,0A,2;,harsha-exposes-countrys-true-debt-in-
parlia(ent,. and the other !ritin% in the penna(e "pecial Correspondent
under the title 5Eonder of 6sia2 'ebt "ustainability throu%h Co(parin%
6pples !ith Bananas7 )a*ailable at2 http2,,!!!+ft+l,2014,0A,2;,!onder-of-
asia-debt-sustainability-throu%h-co(parin%-apples-!ith-bananas, .+
This !riter also responded by ar%uin% that the Central Ban$s second press
release on the subFect had not ans!ered all the issues but so(e selected
ones thereby confusin% the readers further )a*ailable at2
http2,,!!!+ft+l,2014,0A,2;,central-ban-clarifes-on-debt-sustainability-but-
it-be%s-(ore-/uestions-than-the-ones-ans!ered, .+ The press release issued
on 4 July has sou%ht to ans!er only this !riter, lea*in% the other t!o critics
unattended+
The Do*ern(ent debt is not the country$s debt
The press release in /uestion has once a%ain confused the reader ri%ht at
the be%innin%+ The title to the press release indicates that it is on 5"ri #ana
continues to i(pro*e on <=->"C6& &ara(etersG7 as it had done in the
case of the t!o pre*ious releases+ The reference here is clearly on the
country$s external debt and not on the external debt of the Do*ern(ent+
But it has found fault !ith this !riter as !ell as others !ho expressed their
*ie!s on the issue for (istaenly identifyin% the Do*ern(ent$s debt !ith
the country$s external debt+
This is !hat the press release says2 56 fe! co((entaries that ha*e
appeared in recent press articles and reports includin% that of 1r+ E+6+
EiFe!ardene$s )sic. re%ular colu(n in 'aily 4T see( to ha*e atte(pted to
co(pare the &ublic 'ebt 'epart(ent )&''. press release hi%hli%htin% the
i(pro*e(ents in the Do*ern(ent$s external debt position a%ainst the
outstandin% external debt position of the country as presented in the
6nnual :eport 201;+7
9t appears that the drafter of all these press releases has taen the country
indebtedness synony(ous !ith the central %o*ern(ent$s external debt
indebtedness+ 9t is not only confusin% the readers but also (isleadin% the(
because all the (edia !hich had piced up the frst press release had
reported that "ri #ana had i(pro*ed in its external debt indebtedness
%oin% by the title of the release+ "ince these press releases are *etted at
se*eral le*els by senior oHcers before they are released, it is surprisin%
ho! this funda(ental error has crept into all the press releases in /uestion+
9t also raises serious issues relatin% to the reliability of the data bein%
released by the Central Ban+
&'' has %one beyond its (andate and capacity
Then, the press release in /uestion %oes on clarifyin% that &'' !hich
(ana%es the %o*ern(ent debt reports on its external debt position !hile
the ban$s 6nnual :eport 8 a report sub(itted by the Ban$s 1onetary
Board to the 1inister of 4inance and throu%h the 1inister to the public 8
reports on the country$s external debt
There is no issue as far as this !riter is concerned here since it is the true
situation+ Co!e*er, the issue is that &'' !hich has to report on the
Do*ern(ent debt has undertaen to report to the public on the
5i(pro*e(ent of the country indebtedness7 by usin% only the debt
nu(bers relatin% to the central %o*ern(ent+ "ince &'' has no role or
capacity in analysin% the country$s external debt, it has %one beyond its
(andate and ability !hen it has undertaen to report on the country
indebtedness+ This is e*ident in the 6nnual &ublic 'ebt :eport !hich &''
issues analysin% the country$s public debt position+
4or instance, the report issued by &'' in June 2014 under the title 0&ublic
'ebt 1ana%e(ent in "ri #ana 201;,$ !hich has pro*ided the source
(aterial to the frst press release in /uestion in ad*ance has also taled
about the country$s external debt sustainability thou%h its discussion has
exclusi*ely been li(ited to the central %o*ern(ent$s external debt position
)p 4;.+ 6 clarifcation has been presented in the for( of a footnote to Table
24 on 0>xternal 'ebt "ustainability 9ndicators$ on pa%e 4; /ualifyin% that its
analysis is based on the central %o*ern(ent debt+
9f the &'' !ished to be true to this footnote, the correct title of the Table as
!ell as the !rite-up based on it should ha*e been 5Central Do*ern(ent$s
>xternal 'ebt "ustainability 9ndicators7 and not the >xternal 'ebt
"ustainability !hich %i*es a !ron% (eanin%+ The press release !hich has
been released prior to the issue of this report, probably !hile it !as still in
press, does not carry any clarifcation+
Can a central ban force the public to accept !hat it saysI
The &'' is silent on this issue all throu%hout its o@ensi*e press
clarifcations+ 9t has de(anded the readers to accept !hat it has (eant by
the !ordin%s of its press releases despite the fact that those !ordin%s ha*e
con*eyed a di@erent (eanin%+ The tone of the press releases is not that of
a professional central baner but so(eone !ho belie*es that he has
authority to dictate to others !hat they should accept as truth+ This is
defnitely not the role of a trustee as portrayed in 1ahinda Chinthana+
4urther, !hen one uses a ter( !ron%ly, it fxes hi( forcin% hi( to accept
the conse/uences as !ell+ #e!is Carroll has put it nicely in 0Throu%h the
#ooin% Dlass$ )p 1J7 of eBoo. as follo!s2
5The cause of li%htnin%7 6lice said decidedly, for she felt /uite sure about
this, 5is the thunder 8 no, no7 she hastily corrected herself, 59 (eant it the
other !ay7+ 59t$s too late to correct it7 said the :ed Kueen, 5Ehen you ha*e
once said a thin%, that fxes it, and you (ust tae the conse/uences+7
1eanin%ful ris assess(ents should be based on the future and not on the
past
The press release in /uestion has *ery correctly said that the ban$s 6nnual
:eport has presented the country$s external debt calculated in ter(s of the
Ath >dition of the 914$s Balance of &ay(ents 1anual, no!n as B&1A+ This
!riter has no dispute o*er this and in both his responses he had
appreciated the updatin% of the syste(s in the 6nnual :eport as per the
re/uire(ent of B&1A+ That is because B&1A co*ers all types of external
debt that (ay pose a ris to the country$s external debt sustainability+
Ehat is at issue is that the Central Ban 6nnual :eport !as issued at end-
1arch 2014 and the ne! inno*ation !hich it had introduced had not been
(astered by the ban$s o!n &''+ The %ra*ity of the absence of a proper
co((unication syste( bet!een t!o units of the Central Ban arises as
follo!s+
&'' follo!s the <=->"C6& 1anual on >@ecti*e 'ebt 1ana%e(ent !hich, as
this !riter has presented in his t!o responses under reference, is si(ply a
codifcation of the best practices in /uantifyin% external debt of the public
sector and the country as a !hole reco((ended by B&1A and <= "yste(
of =ational 6ccounts+ &'' had so far adopted the reco((endations of <=-
>"C6& 1anual only partially+ But !hen the ban has %one for B&1A, it is
necessary that the syste(s should be har(onised throu%hout the ban in
order to a*oid confusion in its o!n analyses+
The &'' has (ade this %ra*e (istae of treatin% the central %o*ern(ent$s
external debt as synony(ous !ith the country$s external debt (ainly
because of this non-har(onisation of syste(s+ This !riter referred to this as
a situation !here one unit of the Central Ban does not no! !hat other
units of the Central Ban ha*e been doin% due to a breado!n of its
internal co((unication syste(+ The press release has refuted this clai(
thou%h its existence is e*ident e*en fro( !hat it has presented+
Borro!in%s of Do*ern(ent entities too pose a proble(
6 country /uantifes its external debt nu(bers not Fust to co(e up !ith a
f%ure but to assess the ris factors that (ay arise fro( the chan%in%
pattern of the debt-structure+ 6 %o*ern(ent (ay throu%h creati*e
accountin% report a lo! f%ure of external debt by %ettin% the state o!ned
bans and other entities to borro! externally and %ettin% the( to relend
the loan proceeds to the Do*ern(ent+ But if these institutions default their
external loans, as the o!ner of these institutions, the Do*ern(ent !ill be
re/uired to bear the burden+
"ince the Do*ern(ent is only a trustee and the true bearers of the burden
are the people, <=->"C6& 1anual has reco((ended that they should also
be cate%orised as public debt+ 4or instance, if ="B or "ri#anan 6irlines
defaults its debt, it is the public !ho !ill ha*e to ulti(ately bear the
burden+ Thus, broadly speain%, pri*ate debt ulti(ately beco(es public
debt+ This contin%ency liability should be taen into account in any
(eanin%ful debt sustainability analysis as this !riter has ar%ued+
Do*ern(ent entities ha*e borro!ed abroad not on the stren%th of their
balance sheets
The press release in /uestion has ar%ued that those "tate entities ha*e
borro!ed abroad on the basis of the stren%th of the balance sheets of those
institutions+ This is also (isleadin% due to t!o reasons+
4irst, so(e of these institutions ha*e stren%thened their balance sheets not
out of their business stren%ths, but out of the Do*ern(ent$s cleanin% of
those balance sheets by tain% o*er the bad-debts or losses+ Thus, the
public has already taen a ris by absorbin% their losses and it !ill tae a
further ris if these institutions default their external debt pay(ents+
"econd, so(e other institutions %ot their balance sheets stren%thened by
the explicit %uarantees pro*ided by the Do*ern(ent !hich are si(ply
%uarantees i(posed on the public !ithout their appro*al+ ="B and
"ri#anan 6irlines are t!o cases in point+
6 %ood econo(ic analyst should not i%nore these crucial factors !hen he
(aes a ris analysis of their external borro!in%s+ 6s such &'' has
underesti(ated e*en the external debt of the broad public sector by
confnin% only to the borro!in%s of the central %o*ern(ent+ Thus, its
assurance %i*en to the public that the debt situation does not pose a
proble( based on inco(plete nu(bers is (isleadin%+ This is the crux of the
debate and the Central Ban has so far not clarifed it+
Car(onisation of analysis across the Central Ban is a (ust
This !riter !ishes to stress once a%ain that there is a serious non-
har(onisation of the syste(s bein% adopted inside the Central Ban+ 6s he
pointed out in his pre*ious response, in the past it !as done at the 'eputy
Do*ernor$s le*el by freely exchan%in% *ie!s a(on% di@erent units of the
ban+ &'' has published the central %o*ern(ent debt and used those
nu(bers to assure the public that the country$s external indebtedness has
i(pro*ed+ This is a serious (istae !hich has not been noticed by the
ban$s senior oHcers+
6 professionally-oriented central ban should ha*e an apt *ettin%
(echanis( for its public co((unications to assure accuracy and use this
co((unication instru(ent e@ecti*ely+ This re/uire(ent is e(phasised as
extre(ely i(portant in all Central Banin% co((unication trainin%
pro%ra(s because it is only throu%h such a (echanis( that a central ban
is able to (aintain its credibility a(on% the public+
The public does not appro*e of personal attacs on critics
The Central Ban (ay be under the i(pression that the personal attacs it
(aes on its critics are bein% appreciated by the public, but that is not the
case+ This !as hi%hli%hted by a for(er 6ssistant Do*ernor of the Central
Ban, 'r+ 6nila 'ias Bandaranaie, in a recent inter*ie! !ith "irasa T3 in its
6rtha-Thara "eries+
"he e(phasised on the i(portant role !hich criticis( plays by %i*in% an
ad*ance !arnin% of an onco(in% ail(ent+ "he expressed her concern about
the Central Ban$s de%eneratin% to a lo! le*el of (ain% personal attacs
on its critics instead of addressin% the critical issues raised by the(
)a*ailable at2 https2,,!!!+youtube+co(,!atchI
*L;cs(fBb9B21MlistL&#9NC=O<D?rbFe1*Bxuf;4s4cc&>3p=-%J.+
The un!ittin% indict(ents (ade by &''
The pre*ious &ress :elease of &'' had un!ittin%ly indicted the 1onetary
Board of the Central Ban for reportin% a di@erent set of nu(bers in its
6nnual :eport 201; 8 because it had not added re(ittances as part of the
country$s earnin%s fro( export of %oods and ser*ices !hen calculatin% the
debt-ser*ice ratios+ &'' had stealthily added re(ittances to the
deno(inator of the ratios so that it could co(e up !ith lo! nu(bers+ 9ts
latest press release too has (ade an un!ittin% indict(ent a%ainst the
ban$s senior oHcers for failin% to note the di@erence bet!een the
Do*ern(ent$s external debt and the country$s external debt !hen they
*etted all these press releases+
)E+6+ EiFe!ardena, a for(er 'eputy Do*ernor of the Central Ban of "ri #