Uthum Herat, Homo economicus la excepción (1957-2009)

uthumherath

Uthum Herat, PhD., Deputy Governor of Central Bank of Sri Lanka is no more. At the relatively young age of 52, an unexpected stroke took the life of this brilliant economist, only few months after he assumed duties as the senior most non-political appointee with the old lady of Janadhipathi Mawatha.

This is no ordinary obituary as Herat was no ordinary human being. He was an economic man – of a different breed.

Parents couldn’t have named him better. He lived upto the name. Uthum (Great) was everything he did.

The term ‘Economic Man’, says Wikipedia, is largely associated with the works of John Stuart Mill on political economy. Mill proposed an arbitrary definition of man, as a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained. In ‘The Wealth of Nations’, Adam Smith wrote: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Herat was different from Smith’s butcher, brewer and the baker – or for that matter many of us ordinary economic men and women. His contribution to society was not purely in self interest. Never did exist the ‘smallest quantity of labour’. He selected to pay irrationally more, and thus fell out of the typical definition. In ‘The Logic of Life’, Tim Harford may argue that too is rational, but one may not necessarily agree. Spending billable time sharing one’s knowledge with postgraduate students at a local university for a fee of three thousand rupees a day is hardly economical.

Herat believed in markets in his profession, but when observing Sabbath, appreciated the importance of charity. He did both with a passion.

He was a legend, even in his university days. Anecdotes galore. His batchmates remember how they avoid smoking in front of Herat, out of sheer respect – reciprocating the respect he showed others. An assistant lecturer of his was recruited to the Central Bank in the same batch. Herat never stopped calling the former teacher ‘sir’. It was with great difficulty he was convinced such formal addressing is no more necessary between equals.

Having never played the political game, he may not have gained the fame of a typical Sri Lankan economist, but his mastery of the subject was exceptional. Deductions were based purely on evidence, never on politics. Presenting the Annual Report of 2003, to a packed audience, as then head of Economic Research, he denied the popular theory of ‘poor becoming poorer’ under the Wickremasinghe government that was hastily losing its popularity: “I am not kidding anyone. The rich have become richer, but poor too are better off.” Even when challenged by the equally distinguished peers during Q&A, Herat firmly stood on his grounds.

His loss will be felt seriously at the Central Bank. Having entered to fill the vacuum created by the departure of W. A. Wijewardena and Rani Jayamaha, two of the most experienced Central Bankers, who retired recently, Herat now will not serve for eight more years, as expected. The intellectual capacity these three took with them is not something the old lady will easily satiate from its second ranks, even after considerable amount of training.

Larger will be the loss to the country. With a dominant and politically biased Monetary Board (Read the latest Annual Report, if you doubt) the sole consolation to the nation was the professionally trained Central Bankers behind them carefully scrutinizing every move and safeguarding the national interests. Thank them for Sri Lanka still not following Mugabe’s footsteps. The highest currency note is LKR 2,000 not LKR 1 billion. The demise of Herat, unfortunately, will take away this sense of security. The coming years will surely see currency notes with larger denominations and no prizes for guessing whose smiling face will decorate them.

Herat was someone who has certainly made his due contribution to the nation. May his soul rest in peace.

Central Bank of Sri Lanka: A donkey doing dog’s work but not its own

A colourful half page advertisement in Daily News says it all. Central Bank plans a new currency museum at Anuradhapura.

This adds to Central Bank’s innumerable current functions; researching oil drilling, conducting lectures for A/L students, micro-managing micro finance, insisting so called ‘good governance’ on others but not on itself, publishing books on Sri Lanka’s heritage and branding those question them ‘terrorist sympathisers’.

Are these what a Central Bank supposed to do?

We have one most over-staffed Central Banks in the world. One Central Banker for every 10,000 in population. Its per capita staff cost is on par with those at developed countries like Japan, Canada and UK. Majority of this gigantic workforce is doing things nobody expects them to do. Why need a Central Bank for managing provident fund? Where else in the world Exchange control is considered a Central Banking function? (In manpower terms, the largest department of Central Bank of Sri Lanka is Security Services!)

Any Central Bank is supposed to ensure two and only two things:

(a) Financial stability
(b) Price stability

How successful in Central Bank of Sri Lanka in these two functions?

Dreadful. I would not even consider a C minus.

Financial stability?

One day we cannot wake up to find our banks not returning deposits due to a financial system collapse. That is why we pay to have Central Banks. They are supposed to guarantee that financial system is alive and kicking. They are supposed to supervise, catch and stop any culprits.

The banking system in Sri Lanka still stands on its feet not because of Central Bank. The private banks are cautious. The state banks need not be cautious because they are backed by treasury – thanks to tax payers. Had it not been for the treasury support one of the state banks would have taken the system down drains long ago – given the somersaults they do. Pramuka Case is adequate illustration for Central Bank’s ability to prevent a financial institution under its supervision taking enormous risks. Attempts to micromanage micro finance (with less than 1% aggregate capital within system) show their ‘expertise’ in financial systems.

Price Stability?

Ha Ha Ha Don’t make me laugh!

As the sole currency issuing authority (Prabhakaran or Pillayan have not got the idea yet!) Central Bank of Sri Lanka is supposed to maintain the price of Sri Lanka Rupee against international currencies and also its own. It cannot control the rise of price of bread, but if everything costs more than what it was last week, surely there is something wrong with monetary policies. That was what Nobel laureate Milton Friedman said: Inflation is everywhere and always a monetary phenomenon.

Right now Sri Lanka records the highest inflation rate in South Asia and within the top ten countries worldwide. (To be fair, we are still better than Zimbabwe) For the last year it was from 20 – 25%, and now nearly 30%. Markets prices of all goods and services, including essential services are of continuous rise. It has risen to such uncontrollable levels Central Bank of Sri Lanka even unsuccessfully changed the Colombo Consumer Price Index, to diverge the blame. High prices spoiled even the annual Avurudu celebrations throughout the country. Every evidence points that Central Bank is not of control. It has failed to stop printing money (=increasing money supply) in bulk. It has failed to tighten monetary policy. The inflation is so bad the Minister for consumer affairs admits his inability to control prices. A hyperinflation situation is on the cards. This could lead to protests as happened in other countries under similar circumstances.

Inflation is common symptom of a war. Any war needs money, in bulk and fast. The only solution most governments have is to print money in bulk. This brings down the value of money, as there is no increase in the supply of goods and services. 

The negative correlation between the war and economy is not readily understood by the politicians. That is why we need Central Banks. One key role of any Central Bank is to be government’s economic advisor. It is supposed to give independent opinion. We pay for that. Central Bank of Sri Lanka has an Economic Research Department of more than 100 researchers to do just that. Had a single researcher in Central Bank ever pointed out the cause of this inflation? Did they ever advise the government to stop this meaningless war and enter into talks with rebels?

Perhaps it is useless blaming Central Bank as a whole. Its head is a political appointee whose only task seems to be justifying every stupid act of the government. It is unfortunate that Mr Ajith Nivad Cabraal, whose only qualification is an unsuccessful local government politician, sits in the same chair once held by eminent economists of the land. He is not an economist. His knowledge of economics, or rather lack of it, was amply demonstrated when he said he did not print any money and all currency notes in circulation were autographed by the previous governor. What can be expect from somebody who does not even know that in economics ‘money printing’ means an activity far more complex than mere physical print of money?

In UK, the Governor of Bank of England was supposed to write to exchequer informing the remedies if inflation rate crosses mere 2%.  If that cannot be brought under 2% within a period of six months the Governor has to submit his resignation. Mervin King now behaves as his pants are on fire. Fair enough. That was what he is being paid for. Unfortunately no such good governance is practices in this side of the Suez canal.

The evident neglect of duties by head of Central Bank can only lead to a definite economic crisis. What plans government has to stop it? Does at least Mr Ajith Nivad Cabraal admit that it is his fault? Or will we have to continue blaming government for appointing this hapless individual for such a responsible post?