Sri Lanka: Pros And Cons Of Bill To Reform The Central Bank – Analysis
Legal, political and administrative objections pose a challenge to the bill which has to be passed to get the IMF bailout
As part of the 15 measures needed to be taken to get the IMF’s bailout package of US$ 2.9 billion, the Sri Lankan government has introduced the Central Bank of Sri Lanka (CBSL) Bill. The idea is to get the CBSL to manage the country’s monetary policy and debt in an independent and rational manner and as per international practice.
There are legal, political and administrative objections that pose a challenge to the passing of the bill in parliament. But supporters of the bill say that the objections can be overcome. Even the opponents know in their heart of hearts that an independent SBSL is in the country’s best interest and that without it, the IMF might wash its hands off Sri Lanka leaving it in the lurch.
According to the Bill, the autonomy of the Central Bank shall be respected at all times, and no person or entity shall cause any influence on the Governor of the Bank or other members of the Governing Board and Monetary Policy Board or employees of the Central Bank in the exercise, performance and discharge of their powers, duties and functions under this Act or interfere with the activities of the Central Bank. The Bill says that the primary object of the Central Bank shall be to achieve and maintain domestic price stability (control inflation).
A ‘Board of Governors’ will be established to supervise the administration and management of the affairs of the Central Bank and to decide the general policies of the Central Bank other than monetary policy. Its chairman shall be the Governor of the Central Bank. Six members “with expertise” will be appointed to it.
Petition in Supreme Court
But the bill has been challenged in the Supreme Court by a few. One of them is Ms. Jehan Hameed, an entrepreneur and a member of the ruling Sri Lanka Podujana Peramuna (SLPP). Hameed has challenged it on constitutional grounds but there is a political angle to it also. Forces eager to keep political control over the CBSL argue that the bill abridges the constitutional power of parliament over public finance and is therefore a violation of the constitution.
The bill empowers the Central Bank with administrative and financial autonomy. It empowers the CBSL to deal with international sovereign bonds without the sanction of the Parliament, petitioner Hameed says.
By making the Central Bank an autonomous body with wide discretionary powers to determine and implement monetary policy with a “secondary duty” to support the Government economic policy, the bill aims to remove the power of parliament to have “full control over public finance as provided by Article 148 of the Constitution,” the petitioner argues.
Further, the new bill would deprive parliament of its authority to determine and manage the Consolidated Fund as provided by Articles 149 and 150 of the Constitution.
The Bill entrusts the Central Bank with powers to control exchange policy, manage official international reserves and issue and manage the currency of Sri Lanka with independence. It will also enable the bank to cooperate with public international organizations, such as the Asian Development Bank and International Monetary Fund, without the sanction of parliament.
The bill allows the Governing Board to release Deputy Governors to serve in an office or position of international financial institutions or non-financial institutions. There is a provision for releasing officers of the Central Bank to serve in public international financial institutions and other entities. Autonomy to do so could compromise national interests, it is argued.
The bill authorizes the Central Bank to open and maintain cash, precious metals and securities accounts on the books of foreign banks and international organizations including public international financial institutions, without the sanction of the Minister or Parliament. The bank can act as an agent or correspondent of foreign entities at its discretion. In its capacity as financial advisor to the government, the bank can invite advice from foreign elements.
The bank will also acquire wide discretionary powers to act in cooperation with foreign regulatory, supervisory or monetary authorities or public international financial institutions.
Further, the bill limits the accountability of the Central Bank to parliament with discretion to decide in offering its support the economic policy of the government.
According to petitioner Hameed, the bill is inconsistent with Articles 3, 4, 12(1), 27, 28, 43, 44, 75,148, 149, 150, 151, and 154 of the Constitution. The bill should either be struck down or be ordered to be passed by two-thirds of the whole number of the Members of Parliament and approved by the people at a Referendum, she pleaded.
Hameed’s petition casts doubt about the SLPP’s support for the bill in parliament as that party is the main prop of President Ranil Wickremesinghe who wants the bill to get passed so that the IMF loosens its purse strings and pull Sri Lanka out of the financial woods. But those close to Wickremesinghe, like former MP and diplomat R. Yogarajan say that when it comes to the crunch everyone will fall in line because all know that IMF’s help is vital for survival.
Meanwhile, there is a rift in the CBSL itself. The Executive Officers Union of the CBSL has written to the Speaker of Parliament about their own reservation about the Bill. The petition says that bill gives power to the Minister of Finance to determine the number of Deputy Governors and to appoint them with the concurrence of the Governing Board. This, it is pointed out, could result in direct political interference with the management of the bank. The Executive Officers have called for appointments to be made by the Governing Board and not the Minister.
The law provides for the appointment of members of the Governing Board to be six years. But it does not include the Governor, “which would mean that the Governor holds office perpetually, until death, removal or resignation,” the union pointed out. It recommended a predetermined term for the post of Governor.
In defense of the Bill, it is said that it does not affect the power of parliament over public finance because revenue and expenditure policies will continue to be in the hands of parliament. It is only monetary policy that will be in the hands of the CBSL as it has been.
Traditionally, central banks are meant to stabilize inflation. Only independent central banks without political masters breathing down their necks will be able to commit to a clear monetary policy, anchor expectations, and better control inflation, economists say. In countries such as Argentina, Turkey, Venezuela, and Zimbabwe, the erosion of central bank independence due to constant political interference had led to sustained periods of relatively high inflation, the World Bank has said.
However, the central bank’s typical response to an inflationary development is to significantly raise the interest rate, making it more costly for the government to finance its deficit. This could lead to some friction between the bank and the parliament/government, the World Bank added.
A central bank under a qualified, independent and bold Governor could prevent the government from going in for inflationary deficit financing and also reckless foreign borrowings and a reckless and/or unprincipled Governor could also take the country on the wrong monetary policy path.
Therefore, there is a dire need for checks and balances said Dr.Muthukrishna Sarvananthan, head of the Point Pedro Institute of Development, Sri Lanka.
“There has also to be a constant dialogue between the Central Bank and the government. It is necessary for a Governor to know the politics of the country,” Dr.Raghuram Rajan former Governor of the Reserve Bank of India once said. He pointed out that the chief of the US Federal Reserve System meets the US President regularly, indicating the need for close cooperation between a government which is answerable to the people, and an “independent” Central Bank which controls monetary policy so that dysfunctional disagreements are avoided.
Though there are legal and formidable political challenges, supporters of the bill like former MP and diplomat R.Yogarajan think that there is a realization across the political board that Sri Lanka has no option but to go by the conditions of the IMF.