Sledgehammer to central bank autonomyThe passage of the Nepal Rastra Bank Act was seen as a safeguard against political interference.
In an unprecedented and callous move, the government suspended the governor of Nepal Rastra Bank, Maha Prasad Adhikari, on charges of allegedly leaking sensitive information to the media and failing to fulfil his responsibilities as the chief central banker. As per the Nepal Rastra Bank Act 2002, once the government forms an inquiry committee to review the alleged shortcomings of the incumbent governor (or a member of the board of directors), they are automatically suspended from their official duties. Adhikari has completed only two years of his five-year tenure. This untoward turn of events occurred when Finance Minister Janardan Sharma, who had come under constant public criticism for pushing the nation's economy to the cliff edge, decided that the real problem behind the state of the economy lay with the governor and the workings of Nepal Rastra Bank.
It may well be argued that Governor Adhikari fell short of expectations to introduce an innovative monetary policy, incentives and new instruments to kick-start Nepal's import-dependent, balance of payments deficit-wracked, cash-starved, pandemic-hit economy. His monetary policy response to resurrect the Covid-ravaged economy is also debatable. It is also that Governor Adhikari, a publicly known CPN-UML loyalist, was appointed by the erstwhile KP Sharma Oli government.
Nevertheless, the current punitive action against him, prima facie, does not seem to have been triggered by his suboptimal or lacklustre performance, but rather due to the sheer clash of egos between the two. Unquestionably, Adhikari put in relatively better and more sincere efforts to revive economic activities than Finance Minister Sharma. Latest news reports have also suggested that the central bank stood in the way of Minister Sharma's several vested interest-attached deals, including one to release a sum of $35 million in shady funds transferred from a bank account in the United States to one Prithvi Bahadur Shah, a permanent resident of remote Achham district. Therefore, the object here does not appear to be limited only to "penalise" a recalcitrant governor but to thwart permanently the policy autonomy Nepal Rastra Bank enjoys.
The action against Adhikari appears to be a cumulative outcome of the government's head-in-the-sand approach to a looming economic crisis, the finance minister's efforts to come out clean by shifting the entire blame to the central bank governor and sweeping his inefficiencies in managing the economy under the carpet, and Prime Minister Sher Bahadur Deuba's strategy to comply with all demands of Maoist Centre Chairman Pushpa Kamal Dahal to remain in power with the latter's support.
But the obvious cost of this immature political gamble is set to far outweigh the benefits all these cohorts expected to reap. In the short run, Nepal Rastra Bank faces a severe leadership crisis while all major economic indicators roll perilously downhill for want of bold and immediate countercyclical measures. This sledgehammer-like blow to the very core of the central bank's autonomy set the wrong precedent for political interference even when compelling grounds for disciplinary action against the governor existed. In the long run, it is bound to have an adverse impact on the bank's financial sector stability and monetary policy operations.
The rationale behind the central bank's independence is an almost axiomatic and universal best practice that must be appreciated for the three main distinct roles it ought to play free of government interference. The central bank is the domestic lender to the government, which must be nudged to follow the rules as a disciplined borrower. Two, it is the crucial economic advisor to the government for evidence-based policy formulation. And three, as the referee of the financial system, the central bank must work to ensure a level playing field for state and non-state financial players in the market.
As a theoretical evolution, Harvard University economist Dani Rodrik in conceptualising the Augmented Washington Consensus two decades ago, incorporated "independent central banks/inflation targeting" as one of the 10 key pillars of the second generation economic reform after a liberal economic order prevailed in the post-Cold War epoch. This has by now become a global best practice, with customised improvements in different country contexts. In the same spirit, Section 3 (3) of the Nepal Rastra Bank Act 2002, which replaced the 1955 law, states: "The Bank shall be an autonomous and corporate body with perpetual succession."
The enactment of this piece of legislation was deemed to be a much-needed safeguard against political interference to protect the autonomy of the central bank with a largely ensured fixed five-year tenure of the governor. If the government wants to remove the governor, it should not deprive them of a reasonable opportunity to defend themselves before removal, it shall set up an inquiry committee led by a retired Supreme Court justice under Section 23, and the report of the committee shall establish his or her "disqualification" or "lack of capability" to implement central bank functions.
This is the first time a central bank governor has been suspended due to deepened differences with the sitting finance minister since the enactment of the law. In September 2000, the then finance minister Mahesh Acharya had dismissed governor Tilak Rawal, but he was later reinstated by a court verdict. This precedent had made successive governments cautious about attempting to remove the governor. This, in turn, contributed to the induction of stronger provisions in the Nepal Rastra Bank Act in favour of the bank's institutional stability.
It may also be recalled that some hopes were raised towards this end when two successive governors, Yuba Raj Khatiwada and Chiranjibi Nepal, were allowed to complete their full five-year terms despite several changes in government during their period in office. Khatiwada, considered close to the CPN-UML, was appointed in 2010 when Madhav Kumar Nepal was prime minister; and Nepal, as a Nepali Congress loyalist, was appointed by prime minister Sushil Koirala in 2015. They served under five and four different governments, respectively. But the current coalition government appeared absolutely unrelenting towards Governor Adhikari. Such an irresponsible and thoughtless move only impinges upon the country's image as a credible financial sovereign, and may only exacerbate domestic economic woes.