[caption id="attachment_112899" align="alignright" width="276"]
Central Bank Governor Prof. W.D. Lakshman[/caption]
The new Central Bank Bill, proposed and drafted by the previous Government amidst wide objection from the then Opposition party, is expected to be implemented by the current Government after making a number of key changes to the Bill, The Sunday Morning Business exclusively learns.
The Bill was proposed in 2019 to replace the 70-year-old Monetary Law Act and strengthen the independence of the Central Bank of Sri Lanka (CBSL).
Speaking to The Sunday Morning Business, Central Bank Governor Prof. W.D. Lakshman stated that revisions need to be made in the previously drafted Bill and in order to decide on these revisions, the Central Bank will have both internal and external discussions with other banks and relevant government authorities.
“An implementation date of this new Act is entirely dependent on the changes,” Prof. Lakshman stated.
Meanwhile, Treasury Secretary S.R. Attygalle told us that this new Bill will not be the same Bill the previous Government introduced, adding that new policies will be incorporated into the new Bill.
“Still, there have been no discussions on this matter. The Central Bank has to come up with the changes they think have to be made in the Bill. After that, we will discuss those changes, and if it is practical, we will make those changes in the Bill,” Attygalle stated.
Neither Prof. Lakshman nor Attygalle disclosed the changes that would be made in the new Bill. However, as exclusively reported by The Sunday Morning Business in November 2019, the Bill is aimed at increasing the independence of the Central Bank through a number of measures, to which several politicians expressed their opposition.
Oppositions from politicians
As reported by The Sunday Morning Business on 15 September 2019, the Committee on Public Finance (COPF), which was reviewing the new Bill, was sharply divided on the proposal to remove the Treasury Secretary from the Monetary Board of CBSL.
It was understood that then parliamentarians Bimal Rathnayake and Dr. Bandula Gunawardena, representing the Janatha Vimukthi Peramuna (JVP) and the “Joint Opposition”, respectively, at the time in the committee, opposed the move.
JVP parliamentarian and then Committee on Public Enterprises (COPE) Chairman Sunil Handunnetti, a former member of COPF, said that Rathnayake and the JVP as a whole vehemently oppose this proposal.
“The Treasury Secretary being a member of the Monetary Board has never been an issue to the Central Bank. Therefore, we prefer if the current system continues,” he said.
Handunnetti further noted at the time that the Treasury acts as a bridge between the Government and the CBSL, which, if removed, would pose challenges to CBSL’s authority in managing the Employees’ Provident Fund (EPF) and engaging in debt management.
Commenting on the independence the CBSL would be gaining under this new Bill, Handunnetti noted that there is no point in the CBSL being independent when all other institutions in the country are not dysfunctional.
Speaking to The Sunday Morning Business at that point, Dr. Gunawardena also expressed grave concerns about this proposal.
“There is no need to appoint a person from the private sector to the Monetary Board. Just because the International Monetary Fund (IMF) wants changes in the Monetary Board, we cannot agree,” he said.
Meanwhile, Dr. Gunawardena noted that CBSL’s excessive independence under this Bill should not be taken seriously as none of the “independent” institutions in Sri Lanka are actually independent.
“For example, take the Election Commission (EC). Even though it is recognised as an independent institution, it is not independent at all. In fact, it has got into a mess now,” he noted at the time. Speaking further, he suggested changes to the Bill and the review be done by a panel of experienced local economists.
Meanwhile, former President Maithripala Sirisena too at the time had raised concerns over the proposed changes in the Act, according to sources. Sirisena also opposed some changes including the ending of money printing and the independence CBSL would gain under the Act.
Key changes proposed in new Act
The new Central Bank Act was said to carry three main changes. The first is that CBSL’s existing Monetary Board which oversees the institution’s activities will be bifurcated or broken up into two separate boards, namely the “Monetary Board” and a new “Governing Board”. The Governing Board will be responsible for all CBSL’s activities excluding monetary policy decisions.
“A Governing Board of the Central Bank will be established. It will be charged with the responsibility of overseeing the administration and management of the affairs of the Central Bank and the determination of the general policy of the Central Bank, apart from the monetary policy,” the Bill states.
Accordingly, the Monetary Board will be solely responsible for CBSL’s monetary policy formulation and implementation of the flexible exchange rate regime in line with the flexible inflation targeting framework. Neither the Treasury Secretary nor any member of the Government would be members of the Monetary Board.
“The Monetary Board shall consist of the Governor of the Central Bank, who shall be the Chairperson of the Monetary Board, the deputy governors of the Central Bank, and four experts in economics or finance,” the Bill stated.
However, the Treasury Secretary can still be a member of the Governing Board.
“The Governing Board shall consist of the Secretary to the Treasury; Governor of the Central Bank, who shall be the Chairperson of the Governing Board; and three members who shall have expertise in economics, banking, finance, accounting and auditing, law, and risk management,” the Bill further noted.
The second main change is that the CBSL would not be allowed to participate in primary auctions as the Bill would disable money printing by the CBSL.
“This would prevent the Central Bank from participating in primary auctions that take out high-powered money in the most inflationary form of financing off the budget. It leads Balance of Payment pressure, inflation pressure, and asset bubbles. It is really not a good thing and by law, the Central Bank will be able to do away with that,” then CBSL Governor Dr. Indrajith Coomaraswamy noted.
In early November 2019, the Governor stated that money printing was the most destructive action any central bank could take, and the CBSL had done that consistently.
According to the Governor, the implementation of the new Act and disabling money printing will not leave the Treasury without any support as the Active Liability Management Act would provide ample backing for the Treasury.
He added that even if the CBSL stops printing money under this new Act, the Government could borrow over and above any cash flow requirement to build up buffers, and the money would be maintained in separate ring-fenced accounts, purely for liability management both in rupees and foreign exchange.
The third change was the addition of economic growth to the list of objectives of the CBSL. Currently, CBSL’s two primary objectives are economic and price stability, and financial system stability. However, under the amended draft bill, the CBSL would also have to ensure its monetary policy is geared towards gross domestic product (GDP) growth, which goes beyond economic stability.
However, Dr. Coomaraswamy was of the view that if implemented, the new Central Bank Act would be highly beneficial both for the CBSL and the country. He noted that the CBSL was able to raise $ 2 billion since the Easter Sunday incident and $ 2.4 billion three months after the political crisis in 2018 through the issuance of sovereign bonds, mainly due to assurance given to the investors that the Monetary Law Act was in the pipeline.
Central Bank Governor Prof. W.D. Lakshman[/caption]
The new Central Bank Bill, proposed and drafted by the previous Government amidst wide objection from the then Opposition party, is expected to be implemented by the current Government after making a number of key changes to the Bill, The Sunday Morning Business exclusively learns.
The Bill was proposed in 2019 to replace the 70-year-old Monetary Law Act and strengthen the independence of the Central Bank of Sri Lanka (CBSL).
Speaking to The Sunday Morning Business, Central Bank Governor Prof. W.D. Lakshman stated that revisions need to be made in the previously drafted Bill and in order to decide on these revisions, the Central Bank will have both internal and external discussions with other banks and relevant government authorities.
“An implementation date of this new Act is entirely dependent on the changes,” Prof. Lakshman stated.
Meanwhile, Treasury Secretary S.R. Attygalle told us that this new Bill will not be the same Bill the previous Government introduced, adding that new policies will be incorporated into the new Bill.
“Still, there have been no discussions on this matter. The Central Bank has to come up with the changes they think have to be made in the Bill. After that, we will discuss those changes, and if it is practical, we will make those changes in the Bill,” Attygalle stated.
Neither Prof. Lakshman nor Attygalle disclosed the changes that would be made in the new Bill. However, as exclusively reported by The Sunday Morning Business in November 2019, the Bill is aimed at increasing the independence of the Central Bank through a number of measures, to which several politicians expressed their opposition.
Oppositions from politicians
As reported by The Sunday Morning Business on 15 September 2019, the Committee on Public Finance (COPF), which was reviewing the new Bill, was sharply divided on the proposal to remove the Treasury Secretary from the Monetary Board of CBSL.
It was understood that then parliamentarians Bimal Rathnayake and Dr. Bandula Gunawardena, representing the Janatha Vimukthi Peramuna (JVP) and the “Joint Opposition”, respectively, at the time in the committee, opposed the move.
JVP parliamentarian and then Committee on Public Enterprises (COPE) Chairman Sunil Handunnetti, a former member of COPF, said that Rathnayake and the JVP as a whole vehemently oppose this proposal.
“The Treasury Secretary being a member of the Monetary Board has never been an issue to the Central Bank. Therefore, we prefer if the current system continues,” he said.
Handunnetti further noted at the time that the Treasury acts as a bridge between the Government and the CBSL, which, if removed, would pose challenges to CBSL’s authority in managing the Employees’ Provident Fund (EPF) and engaging in debt management.
Commenting on the independence the CBSL would be gaining under this new Bill, Handunnetti noted that there is no point in the CBSL being independent when all other institutions in the country are not dysfunctional.
Speaking to The Sunday Morning Business at that point, Dr. Gunawardena also expressed grave concerns about this proposal.
“There is no need to appoint a person from the private sector to the Monetary Board. Just because the International Monetary Fund (IMF) wants changes in the Monetary Board, we cannot agree,” he said.
Meanwhile, Dr. Gunawardena noted that CBSL’s excessive independence under this Bill should not be taken seriously as none of the “independent” institutions in Sri Lanka are actually independent.
“For example, take the Election Commission (EC). Even though it is recognised as an independent institution, it is not independent at all. In fact, it has got into a mess now,” he noted at the time. Speaking further, he suggested changes to the Bill and the review be done by a panel of experienced local economists.
Meanwhile, former President Maithripala Sirisena too at the time had raised concerns over the proposed changes in the Act, according to sources. Sirisena also opposed some changes including the ending of money printing and the independence CBSL would gain under the Act.
Key changes proposed in new Act
The new Central Bank Act was said to carry three main changes. The first is that CBSL’s existing Monetary Board which oversees the institution’s activities will be bifurcated or broken up into two separate boards, namely the “Monetary Board” and a new “Governing Board”. The Governing Board will be responsible for all CBSL’s activities excluding monetary policy decisions.
“A Governing Board of the Central Bank will be established. It will be charged with the responsibility of overseeing the administration and management of the affairs of the Central Bank and the determination of the general policy of the Central Bank, apart from the monetary policy,” the Bill states.
Accordingly, the Monetary Board will be solely responsible for CBSL’s monetary policy formulation and implementation of the flexible exchange rate regime in line with the flexible inflation targeting framework. Neither the Treasury Secretary nor any member of the Government would be members of the Monetary Board.
“The Monetary Board shall consist of the Governor of the Central Bank, who shall be the Chairperson of the Monetary Board, the deputy governors of the Central Bank, and four experts in economics or finance,” the Bill stated.
However, the Treasury Secretary can still be a member of the Governing Board.
“The Governing Board shall consist of the Secretary to the Treasury; Governor of the Central Bank, who shall be the Chairperson of the Governing Board; and three members who shall have expertise in economics, banking, finance, accounting and auditing, law, and risk management,” the Bill further noted.
The second main change is that the CBSL would not be allowed to participate in primary auctions as the Bill would disable money printing by the CBSL.
“This would prevent the Central Bank from participating in primary auctions that take out high-powered money in the most inflationary form of financing off the budget. It leads Balance of Payment pressure, inflation pressure, and asset bubbles. It is really not a good thing and by law, the Central Bank will be able to do away with that,” then CBSL Governor Dr. Indrajith Coomaraswamy noted.
In early November 2019, the Governor stated that money printing was the most destructive action any central bank could take, and the CBSL had done that consistently.
According to the Governor, the implementation of the new Act and disabling money printing will not leave the Treasury without any support as the Active Liability Management Act would provide ample backing for the Treasury.
He added that even if the CBSL stops printing money under this new Act, the Government could borrow over and above any cash flow requirement to build up buffers, and the money would be maintained in separate ring-fenced accounts, purely for liability management both in rupees and foreign exchange.
The third change was the addition of economic growth to the list of objectives of the CBSL. Currently, CBSL’s two primary objectives are economic and price stability, and financial system stability. However, under the amended draft bill, the CBSL would also have to ensure its monetary policy is geared towards gross domestic product (GDP) growth, which goes beyond economic stability.
However, Dr. Coomaraswamy was of the view that if implemented, the new Central Bank Act would be highly beneficial both for the CBSL and the country. He noted that the CBSL was able to raise $ 2 billion since the Easter Sunday incident and $ 2.4 billion three months after the political crisis in 2018 through the issuance of sovereign bonds, mainly due to assurance given to the investors that the Monetary Law Act was in the pipeline.