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No Central Bank Act this year

18 Apr 2021

  • Implementation not in our policy framework, Central Bank says

  • Bill initially drafted under Yahapalanaya

By The Sunday Morning Business Desk   The new Central Bank Bill – proposed and drafted by the previous Government amidst wide objection from the then-Opposition Party – which was expected to be implemented by the current Government after a number of key amendments, will not be implemented this year, The Sunday Morning Business learns.  Speaking to us, Central Bank of Sri Lanka (CBSL) Governor Prof. W. D. Lakshman stated that there will not be a new Central Bank Act this year, as it is not on the CBSL’s planned framework for the current year.  The Bill was proposed in 2019 to replace the 70-year-old Monetary Law Act and strengthen the CBSL’s independence. Nevertheless, the present Government did not want to implement the exact draft made by the former Government.  Therefore, Prof. Lakshman told us earlier this year that revisions need to be made in the previously-drafted Bill; and in order to decide on these revisions, the Central Bank will hold internal discussions, as well as external discussions with other banks and the relevant government authorities.  The initial draft of the Act faced wide criticism from the then-Opposition, which is currently the ruling party. 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 CBSL Monetary Board. It was understood that then-MPs 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 MP 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 opposed 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 had said at that point. 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 would be 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 that 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 was that CBSL’s existing Monetary Board, which oversees the institution’s activities, would be bifurcated or broken up into two separate boards, namely the “Monetary Board” and a new “Governing Board”. The Governing Board would 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 would 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 could 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 was 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 high-powered money in the most inflationary form of financing off the Budget. It leads to 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, but that the CBSL had done that consistently. According to the Governor, the implementation of the new Act and disabling of money printing would not leave the Treasury without 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.  

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