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The Monetary Law Act (MLA), which established Sri Lanka’s monetary system and the Central Bank in 1949, will soon be repealed and replaced by a new Central Bank Act, The Sunday Morning Business learns.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.

According to the Governor, implementation of the new Act and its two main changes will not leave the Treasury without any support as the Active Liability Management Act would provide ample backing to the Treasury.

He added that even though the Central Bank stops printing money under this new Act, the Government could borrow over and above any cashflow requirement to build up buffers and the money will be maintained in separate ring-fenced accounts, purely for liability management both in rupees and foreign exchange.

“So if the Government gets into a fix, instead of forcing Central Bank to create money, all it has to do is use the money in these accounts to pay down some debts, to create some space for it to do some additional borrowings. It is a far more orderly and far less disruptive way of doing things. So it is extremely important that this Act is passed,” he said.

The inclusion of economic growth into the list of objectives of the CBSL is a significant step. Currently, the 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.

In its Road Map 2019, the CBSL outlined plans to implement flexible inflation targeting (FIT) as its new monetary policy framework by 2020. In fact, in September, Coomaraswamy addressing an event noted that Sri Lanka has already transitioned to a flexible inflation targeting monetary policy regime, well ahead of the 2020 deadline.

In light of the latest amendment to the Bill, the CBSL will have to take into consideration economic growth, alongside its current focus on inflation targeting. As the Central Bank has adopted a flexible inflation targeting regime, the inflation target can be amended by the Finance Minister with legitimate reasons in the event the economic growth needs to be accelerated.

The Governor said he believes the Central Bank Bill has already been presented to Parliament by Finance Minister Mangala Samaraweera.

Photo: Eshan Dasanayaka