Central Bank’s Profits/Losses Have No Relevance For Its Conduct Of Monetary Policy
By Sirimevan Colombage –June 1, 2016
Prof. Sirimevan Colombage
Several newspaper articles have appeared recently with regard to the losses incurred by the Central Bank for the third consecutive year in 2015. A critic has alleged that the continuously loss-making Central Bank is no better thanSriLankan Airlines. It was further argued that when a central bank becomes bankrupt with a negative networth due to continued losses, the public as the owners of the central bank are required to recapitalize the bank at great costs.
A clarification on these issues is called for as such haphazard remarks might give a wrong impression to the public that the Central Bank is just another inefficient loss-making public enterprise that needs to be recapitalized using public funds to avoid bankruptcy.
In the context of the broader national economic goals assigned to the Central Bank as the country’s monetary authority, it is inaccurate to equalize the Bank with a loss-making airline which became bankrupt due to its own mismanagement. The implications of profits or losses of a central bank need to be analyzed by taking into account its unparalleled legal status in the monetary system rather than partially looking at a decline in its capital base as in the case of a commercial entity.
Central banks are not commercial enterprises
Central banks all over the world have been functioning as public policy institutions but not as commercial ventures which are driven by the profit maximization motive.
In terms of the Monetary Law Act (MLA), the objectives of the Central Bank of Sri Lanka are to ensure (a) economic and price stability, and (b) financial system stability, with a view to encouraging and promoting the development of the productive resources.
Hence, one could argue that it is inappropriate to equate the Central Bank with a commercial enterprise like a loss-making airline, and to conclude that the Bank would go bankrupt with its continuous losses. Admittedly, empirical evidence suggests that a stronger capital base of a central bank helps to carry out its functions smoothly without compromising its independence. But it does not mean that central banks should drive their monetary policy operations keeping profit motive in the forefront undermining its monetary policy objectives which are of broader national interest.