- Too complicated take up before election - Mutually beneficial for CBSL and country - Would de-risk economy By Madhusha Thavapalakumar The Central Bank Act, which would replace the 70-year old Monetary Law Act and strengthen the independence of the Central Bank of Sri Lanka (CBSL), is highly unlikely to be enacted before the 2020 general election. The Bill is currently with Parliament, according to CBSL Governor Dr. Indrajit Coomaraswamy. This was disclosed by Dr. Coomaraswamy during his seventh and final Monetary Policy Review of 2019 at the CBSL on Friday (29). “The Bill is now in Parliament. Clearly, it is unlikely that it will be taken up before the parliamentary election. It would be surprising if such a major piece of legislation is taken up. I’m still very hopeful that it will go through,” Dr. Coomaraswamy noted. As exclusively reported by The Sunday Morning Business on 3 November, the new Central Bank Act will carry three main changes. The first is that that the 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 whole 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 the 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 states. However, the Secretary to the Treasury 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 notes. 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,” the Governor noted. In early November, the Governor stated that money printing was the most destructive action any central bank could take, and the CBSL has 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 ringfenced accounts, purely for liability management both in rupees and foreign exchange. The third change would be the addition of economic growth to the list of objectives of the CBSL. 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. As reported by The Sunday Morning Business on 15 September, the Parliamentary Committee on Public Finance, which was reviewing the new Act, was sharply divided on the proposal to remove the Treasury Secretary from the Monetary Board of the CBSL. It was understood that Parliamentarians Bimal Rathnayake and Bandula Gunawardana, representing the Janatha Vimukthi Peramuna (JVP) and the “Joint Opposition” respectively at the time in the committee, opposed the move. JVP Parliamentarian and Committee on Public Enterprises (COPE) Chairman Sunil Handunnetti, a former member of the Public Finance Committee, 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 the CBSL’s authority in managing the Employees’ Provident Fund (EPF) and engaging in debt management. Commenting on the independency the CBSL would be gaining under this new Act, Handunnetti noted that there is no point in the CBSL being independent when all other institutions in the country were not dysfunctional. Speaking to The Sunday Morning Business at that point, Minister Gunawardana 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. Gunawardana appreciated curtailing money printing but did not appreciate it happening through the new Monetary Law Act and emphasised that it should be done another way. “I’m not a person who is against amendments and I do support some of the changes. Money printing falls into that category. We have to find alternate measures; not in this way,” Gunawardana noted at the time. Meanwhile, Gunawardana noted that the CBSL’s excessive independence under this Act 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 gotten into a mess now,” Gunawardana noted at the time. Speaking further, he suggested changes to the Act and the review be done by a panel of experienced local economists. Meanwhile, former President Maithripala Sirisena, at the time, had also 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 the CBSL would gain under the Act. However, Governor Dr. Coomaraswamy is of the view that if implemented, the new Central Bank Act would be highly beneficial both for the CBSL and the country. He emphasised the importance of the Monetary Law Act which had already begun to provide benefits to the country, despite criticisms. During the sixth Monetary Policy Review early last month, 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. “One of the things that really worked in our favour was that we were able to tell investors that we are in the process of drafting a monetary act which would increase the independence of the CBSL. If we are an upper middle-income country, we have to have frameworks for making macroeconomic policies transparent,” Dr. Coomaraswamy noted. He noted that Sri Lanka’s external financing requirements and domestic financing requirements, going forward, need de-risking, and said that this Act would immensely help in that regard. Speaking further on the positive aspects of the Act, the Governor added that the new Bill also includes a section for macroprudential surveillance. “There is a whole new section of macroprudential surveillance and one of the lessons coming forward from the global financial crisis is that this is an area where central banks must build capacity and be very active. The new Bill puts that in law.” The Monetary Law Act No. 58 of 1949 established the monetary system of Sri Lanka and the CBSL to administer and regulate the system.