I was deeply concerned about what seems corruption in the Central Bank, an institution that had never previously roused any suspicion on such grounds. What we have thus far discovered at the Committee on Public Enterprises is startling, but obviously I cannot refer to this now.
I thought therefore of basing this article on the observations of Dr W A Wijewardena, former Deputy Governor of the Bank, who writes a regular column on Economic Matters. Some weeks back his article was entitled ‘From bomb disaster to bond disaster: How to restore the lost reputation of the Central Bank’.
He dealt first with the bomb attack on the Central Bank way back in 1996. I still remember the incident vividly, since my sister was caught up in the attack, but unlike many of her colleagues she survived unhurt, being only drenched in blood (and walked back in that condition to our house).
Dr Wijewardena’s article commended the prompt actions of the Governor at the time, A S Jayewardena. Having described the actions he took to ensure that the Bank continued to fulfil its financial obligations, he discussed the way the media was handled. I can do no better than quote at length from what he said, in dealing with ‘a media briefing that was attended by both the local media and all the major international media agencies that had a presence in Sri Lanka. This was the opportunity which AS used to communicate to the Bank’s stakeholders that the Bank was not dead, it had started to offer its services through alternative methods until it would get back to normalcy and it would soon restore normalcy as desired by its stakeholders. The media, exercising their right to extract all the information to keep their respective audiences informed of the true status, were very critical and posed scathing questions to Governor and the senior officers of the Bank. Their questions were particularly directed to ascertain whether there was any cover-up of the true damage caused to the Bank by its senior officers. This was in fact a testing of the maturity and experience of Governor Jayawardena who was a career central banker, a former Finance Secretary and an international civil servant. Prior to the media briefing, the senior management of the Bank had participated in a crucial staff meeting and a meeting with CEOs of commercial banks. Hence, they were privy to what was happening and therefore could meet the press with one voice. That was important to quell the suspicions of the media-personnel. Thus, the media briefing was successful in communicating the Bank’s position to its stakeholders.’
Dr Wijewardena goes on to talk of the crucial need for ‘Clarity and transparency in central bank communications’. He noted that ‘What Governor Jayawardena demonstrated was that central bank’s communication policy was important in establishing its reputation among the stakeholders. The Bank should not have any fear of coming before the media and explaining its position to the public. If it does not, the media as well as the public start suspecting that there could be some underhand dealings in the Central Bank which the Bank attempts to conceal from the public. The principles and the ethical ground which the Central Bank should follow when communicating with the public were discussed by this writer in an article…In this article, it was pointed out that the communication policy of a central bank should be based on three essential pillars. They were the clarity, transparency and predictability of central bank actions. The central bank should be ready to clarify not only what it has done or what it has proposed to do but also any rumour in the market damaging the bank’s reputation. In doing so, it should speak the truth so as to win the confidence of the public. If it does not, it cannot prevent the public from losing their confidence in central bank’s actions. The loss of confidence will erode the reputation of the bank as well.
Team spirit is key to regain reputation
One important contributor to the rebuilding of the Central Bank while preserving its reputation after the bomb explosion was the excellent teamwork displayed by all the senior officers of the Bank. There was healthy competition among the senior officers to do the best for the Bank as it should be in any growing and dynamic institution. However, when it came to rebuilding and modernising the Bank, all senior officers functioned as a single team demonstrating team-spirit in every move they made. Within teams, there were differing opinions expressed by team members. Harbouring differing opinions by staff was encouraged because that culture led to the building of a creative workforce. However, they were debated freely at team meetings allowing the Bank to choose the best path for its future development.
Dr Wijewardena then goes on to say ‘Bond explosion far worse than bonb explosion’. His argument is as follows –
The damage done by the bond explosion is not visible to the naked eye as was in the first disaster. But it is far worse than the bomb explosion since it has taken the reputation away from the Bank in a single stroke. The Central Bank, over its 65 years of existence, had not been black-marked in public by such a serious scandal. For a central bank, its reputation is the best asset it has. If it is compromised, it would be difficult for the Bank to regain the confidence which its stakeholders have reposed in it. These stakeholders should not be treated lightly because they all are involved in the national economy’s lifeline, namely, funding and financing of its activities. Stakeholders outside the country such as IMF, World Bank, ADB, global investors and foreign central banks and governments rely on the country’s central bank for correct economic information, internal governance practices and safeguard of the rights and interests of foreign lenders.
The domestic stakeholders, namely, the public, accepts the money issued by a central bank not because it is backed by a government order but by the trust they place in a central bank. This was analysed by this writer in a previous article….. The article argued that trust “depends on the integrity, professionalism and true adherence to the governance principles by those who run central banks” Reputation is built on these three pillars and if any pillar is damaged, so will be the reputation. Thus, any dent in reputation, however-much it is trivial in the opinion of those who run central banks, is a matter of serious concern by all these parties.
Dr Wijewardena’s contention is that the ‘Bond explosion has been badly handled’. He says ‘In the recent bond explosion fiasco, it does not appear that the Central Bank has followed a clear communication policy. When the rumour that an insider dealing has taken place in the 30 year bond issue started to spread in the market, the Central Bank had become strangely silent. Its silence then fuelled new rumours that dented the Bank’s reputation effectively. All opposition forces rallied round the rumour and it soon became hot news for the media. While the local market became agitated, the international markets became extremely nervous. This was further fuelled by the defensive stand taken by the government which had come to power on the pledge of establishing good governance in the country. Thus, the attack made by critics was not only on the alleged insider dealing in the bond issue but also on the type of good governance being promoted by the government. Hence, the biggest victim of the bond explosion was the long honoured concept of good governance which became a mockery after the inaction of both the Central Bank and the government to listen to the pulses of the people. With the passage of each day, more and more civil society organisations including major political parties are demanding that the Governor of the Bank should take responsibility for the whole fiasco and step down from his position. The action of such political parties provides a fine example that they are correctly reading the pulse of the people. No government can survive if it is unable to read the changing rhythm of the pulse of the people and act accordingly.’
Dr Wijewardena asserts at the end that ‘It is still not too late to change the course’. He declares ‘The Central Bank has been hit by a bond disaster severely denting its reputation in the market. It will not be difficult to restore the lost reputation in the Bank if the government and the Bank act with full openness and transparency. It is still not too late to change the course that is now leading the Bank to a self-destruction, a goal which terrorists had failed to achieve some 19 years ago.’