Central Bank Act to replace Monetary Law Act
– Monetary Board to be broken up into two
– Treasury Secy. not in Monetary Policy Committee
– Economic growth added to CBSL objectives
The Monetary Law Act (MLA), which established Sri Lanka’s monetary system and the Central Bank in 1949, will soon be repealed and replaced by a new Central Bank Act, The Sunday Morning Business learns.
The new Act will carry three main changes. The first is that that the Central Bank’s existing Monetary Board which oversees the institution’s activities will be bifurcated or broken up into two separate boards. Secondly, the Central Bank would not be allowed to participate in primary auctions, while the third being that economic growth will be added to the list of objectives of the CBSL.
Addressing a forum on Friday (1) evening, Central Bank of Sri Lanka (CBSL) Governor Dr. Indrajith Coomaraswamy noted that upon the bifurcation, a Monetary Policy Board will be formed comprising economists. The Monetary Policy Board will be responsible solely for the monetary policy formulation of the CBSL. Neither the Treasury Secretary nor any member of the Government would be a member of this Board.
Dr. Coomaraswamy noted that the second Board would be a governing board which would oversee all the activities of the CBSL, apart from the monetary policy decisions. The Treasury Secretary would be a voting member of the Governing Board.
Reliable sources told us that all members of the Monetary Policy Board are eligible to be members of the Governing Board.
The Sunday Morning Business exclusively reported on 13 October, in an article titled “Two big changes to Monetary Law Bill’ that the Treasury Secretary had been retained on the Monetary Board as a non-voting member in the new Monetary Law Act. This was following objections raised by member of the Public Finance Committee of Parliament which was reviewing the bill about the complete divorce of monetary policy and fiscal policy.
However, now we find out that the current Treasury Secretary, Dr. R. H. S. Samaratunga, was not in favour of this, as it is considered improper for the Treasury Secretary, who is considered the Chief Accounting Officer of the Government, to be a non-voting member of any board. There had also been a desire to completely disconnect the Treasury Secretary from monetary policy formulation.
As per the existing Monetary Law Act, the Treasury Secretary is one of five members on the Monetary Board headed by the Governor of the CBSL. Economists have long lamented the CBSL being pressurised by successive governments to align its monetary policy with the political goals of each government.
Speaking further on the second change in the new Act on Friday, Dr. Coomaraswamy emphasised that if the Bill was passed, by law, the CBSL would not be permitted to participate in the primary auction, which would be a major victory for Central Bank independence.
“In the past, whenever the Government is out of money, the CBSL had to print money. This is the most destructive thing any central bank can do and we have done that consistently. It leads to inflation, payment pressure, and it leads to asset bubbles,” he noted.
Dr. Coomaraswamy noted that since the country has achieved the upper middle-income rank, having the same old fiscal, monetary arrangements would not be helpful to build market confidence.
“We have to create an architecture which is suitable for an upper middle-income country and local and foreign market participants need to see that separation and architecture so that we can build confidence, that policies in the future will be more consistent and predictable in terms of monetary policy formulation,” he added.