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Dr Farrell: No Sacred Cows revisited; understanding the PNM’s assault on Central Bank

“[…] The PNM administration seems allergic to institutions which are independent within the executive and run by unelected persons. 

“It is clearly one of the reasons for the pre-emptive assault on the Office of the Procurement Regulator rendering it a eunuch, so that the hands of elected ministers will not be ‘tied’ by unelected officials…”

The following column on the PNM government’s relationship with independent institutions in general and the Central Bank in particular was submitted to Wired868 by economist Dr Terrence W Farrell:

Photo: The Eric Williams Financial Complex.
(Copyright Investt.co.tt)

Seven years ago I wrote an article entitled ‘No Sacred Cows’, which took to task the then UNC government for what I described as its termitic assault on our institutions—exemplified then by its increasing the size of the board of the Central Bank and its selection of the less qualified Jwala Rambarran as Governor. 

Rambarran went on to confirm my assessment with policy mistakes and manifest lack of judgment on the foreign exchange market, and disregard for the importance of banker-client confidentiality.

But the UNC’s troubling assaults pale in comparison with the sledgehammer the PNM has taken to the Central Bank over the last five years. The PNM administration seems allergic to institutions which are independent within the executive and run by unelected persons. 

It is clearly one of the reasons for the pre-emptive assault on the Office of the Procurement Regulator rendering it a eunuch, so that the hands of elected ministers will not be ‘tied’ by unelected officials. Accountability to Parliament is offered up as a fig leaf, but without a substantial back bench, parliamentary accountability is a serious joke!   

Constitutionally, there are several institutions which are within the executive branch but are, to varying degrees, protected from ministerial reach. These include the DPP, the Police Service, and the Service Commissions. 

Photo: Director of Public Prosecutions Roger Gaspard SC.
(via Trinidad Express)

Central banks can also be categorised as ‘independent within the executive’ because history has taught societies that the executive is prone to ‘debase the currency’ and cannot be entirely trusted with the people’s money. However, there is also recognition that the government is ultimately responsible and Central Bank legislation typically provides (as ours does at Section 50) for the government’s view on monetary policy to prevail where there is fundamental disagreement. 

Central bankers are highly trained, professional people skilled in economics, banking and regulation. These skills are required to formulate and implement monetary policy and supervise financial institutions (banks and insurance companies) whose businesses are becoming more complex and hence riskier. 

It’s not that central bankers do not make mistakes. They do, as Alan Greenspan did after 9/11 by keeping interest rates too low and precipitating the sub-prime mortgage crisis which morphed into the global financial crisis of 2009. But they are rather less likely to mess up than politicians who have their eyes and hands on the public purse. 

But if the government thinks it infra dig to engage with and even defer to unelected central bankers on policy, then it will opt to exercise control.

Photo: Minister of Finance Colm Imbert (centre) poses with the Central Bank Board in February 2019.

So what has been done with the Central Bank? First, Sandra Sookram having departed quietly into the night, the Bank is now without any deputy governor at all, and a governor whose 5-year term expires next week, just before Christmas. 

Moreover, there has been no substantive inspector of financial institutions (equivalent to a deputy governor) for several years, with acting appointments by Michelle Chong-Tai Bell and now Patrick Solomon. 

Together with the fact that since April, there are no commissioners appointed to the SEC and an acting appointee at the FIU since 2019, the supervision of the financial system cannot be said to be soundly placed. The recent IMF Financial Stability Assessment report rang alarm bells on the effectiveness of the supervisory authorities and recommended that:

‘Financial supervisors should be given powers to issue prudential regulations and take supervisory decisions independently from the MoF [Ministry of Finance]. The lack of such powers, combined with the excessively long time it currently takes to implement regulations, means that the supervisors currently operate without binding powers in key areas, limiting their effectiveness and compliance with international standards.’

Photo: New $100 bills (via looptt.com)

Second, in the last five years, the Central Bank Act has been amended four times.  The first was to increase the permissible funding of the budget deficit by advances under section 46(2) from 15% to 20%. The 15% maximum had been there from inception and retained even during the crisis of the 1980s! 

Another amendment gave the minister power to demand information on staff compensation and salary structure, even though two permanent secretaries are ex officio on the board.

The third amendment—the only one where the Bank was meaningfully consulted beforehand—dealt with the demonetisation project instigated as a national security measure, which has produced nothing by way of prosecutions and a fanciful inference that all the unaccounted for $100 notes are or were in the hands of criminals. 

The last amendment passed in the Senate, changes the term of the governor from five years (where it has been from inception) to a minimum of 3 years—in order to ‘give the government the flexibility to engage the governor for a shorter period of time’.  The governor and deputy governors, instead of inhabiting offices with some security of tenure consistent with their independence, are now to be treated like the political appointees to any state enterprise or statutory board. 

Photo: Central Bank governor Dr Alvin Hilaire.

It also suggests that the considerations relative to the selection of a governor or deputy governor are so arbitrary and whimsical that the government can realise after three years that the person they appointed is not up to the task. 

Beyond these legislative changes, it is clear to knowledgeable observers that the management of exchange rate policy and the foreign exchange market has not been directed by the Central Bank these last five years. It is inconceivable that the Bank would have continued to operate a policy that is manifestly sub-optimal and has proven to be ineffective in correcting the current account imbalance and stopping the haemorrhage of foreign exchange reserves. 

Moreover, the lack of regard for the Bank’s expertise is reflected in the fact that the governor was not an automatic pick for the Roadmap to Recovery team, despite the critical importance of monetary and exchange policy to any recovery strategy.

There are always tensions between elected officials and independent institutions—the Judiciary, the DPP, the Police, the Procurement Regulator, and in economic policy, the Central Bank. But it is critically important that, except for the Judiciary, those tensions and even conflicts be ‘institutionalised’ with sensible processes for debate and compromise. 

Photo: Prime Minister Dr Keith Rowley (left) and Minister of Finance Colm Imbert.
(via Trinidad Express)

It cannot be in the public interest that to get its way, the government would weaken or destroy those institutions. History has taught us that all power needs to be prevented from its abuse by suitable checks and balances.   

Are we on the road to becoming Naipaul’s Third World’s Third World, or do we just like it so?

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