Draft Central Bank Act could be revised to provide for its independence and accountability – CBSL Governor Dr. Nandalal Weerasinghe

By Hiran H. Senewiratne

The draft Central Bank Act could be revised to strengthen its provisions taking into account the independence of the entity, price stability, monetary policy and governance structure of the Central Bank, before the Act is passed in parliament, Central Bank Governor Dr. Nandalal Weerasinghe said.

“Some critics have pointed out the possibility of the proposed Central Bank Act deepening policy confusion involved in money and exchange policy conflicts, giving wide discretion to the Bank to trigger forex shortages, as has happened in the past and as many Third World central banks have done, the Governor said at a public forum at the Centre for Banking Studies, Rajagiriya, last Thursday.

Dr Weerasinghe added, among other things: ‘The Central Bank of Sri Lanka, from its inception more than 72 years ago, has failed to control inflation. This was mainly because the CBSL was wrongly influenced by successive governments to suppress the US dollar rate while not allowing market forces to determine the parity rate of the rupee against the dollar and even interest rates.

‘The proposed Act will promote accountability and the independence of the CBSL, which would enable it to take proper and right decisions for the betterment of the economy, subject to a framework.

‘Besides, bank interest rates were set by governments at their whims and fancies, which was detrimental to the entire economy.

‘The New Act will provide for two boards, namely, the Governing Board and Monetary Policy Board. This new Act will also take steps to control inflation and provide for the adoption of an international standard framework, called the Flexible Inflation Targeting Framework.

“When it comes to accountability, the Central Bank will be accountable to parliament through a sub- committee. That subcommittee will report to parliament. Further, the Central Bank Governor and other top officials will be appointed for a fixed term, which would create consistency in decision-making.

‘The new Act also will also enable the setting-up of a Macro-prudential Authority to regulate the banking system, set up a proper governance system and create proper coordination between the government and the Central Bank.

‘Besides, the Central Bank law should not be drawn-up by the central bank itself.

‘It has to be done in some independent way. This has been done by consulting the Attorney General, legal draftsman and experts. That is how it has been done.

‘When the Act is drafted and it comes to parliament, some shortcomings may be seen in it. We also see some small parts that should be changed.’