Relative stability was the outcome of a united effort from the outset: CB Governor

By Sanath Nanayakkare

The relative stability the country has managed to achieve having put the worst behind it was the result of collaborative effort of the policymakers, the parliament and the Central Bank of Sri Lanka, Central Bank Governor Dr. Nandalal Weerasinghe said addressing a forum at the Central Bank recently.

The Governor said so responding to a comment from a participant at the forum to the effect: “Governor, there are a number of individuals claiming to be the ‘owners’ of the relative stability the country has achieved, but we know who the ‘real owner’ of this remarkable shift is.”

Responding to the above comment the Governor said,” First of all I must say it is wrong to say that there is an owner for this. We have been able to achieve some success as a team; the CBSL and the government. In fact, difficult decisions were made by the parliament such as increasing taxes, implementing cost reflective pricing on utilities which were made possible with stability in the political realm. Firm decisions had to be taken by the government. So it was a collaborative effort in one direction. Both the monetary policy and the fiscal policy were appropriately coordinated to take the stability effort in one direction. And that coordinated effort brought the volatile situation to some semblance,” he said.

“Now the Central Bank has independence that insulates monetary policy from political interference and thus the institution has been strengthened. The other side of the coin is the government’s fiscal policy. People elect their representatives to make fiscal policy to direct the economy besides other legislations. That’s the right of the people and that lever is in the hands of the people. If people think that the current path is correct, then they have to tell their representatives to stick to that direction. If their representatives say that they are going to take another path, then the people have to question them and make sure that the alternate path will have no pitfalls. I am not saying which way the people need to choose. It is their right.”

The Governor went on to say that the country needs to have an institutionalized framework to strengthen government fiscal policy.

“There was a Fiscal Management (Responsibility) Act in 2001- 2003, but the budget deficit targets and central government debt targets set by it were changed by the elected representatives themselves from time to time. That contributed to what has happened today. A new Public Financial Management Bill will be brought to parliament next year. I think currently the Ministry of Finance is drafting it. Once it is approved, elected members can’t increase budget deficit, government debt or expenditure as they wish. If they deviate from it under any circumstances, it is mandatory for them to restore the desired situation as per the law.”

“An Independent Budget Office (IBO) has been established to ensure checks and balances. If the parliament brings any tax proposals/expenditure proposals, the IBO will independently analyze and assess and ask where do you get the money for this- by borrowing or raising taxes, and then that independent assessment will be communicated to the parliament. The elected representatives may not always be fiscal policy experts. That is why this has happened today. The technical assistance the elected representatives need will be provided by the IBO. If we have checks and balances through such institutions and the Executive branch, the legislature branch and the Judiciary branch’s checks and balances – then decisions can’t be made because there is majority power in parliament. Ways and means of handling the economy in a sustainable way need to be justified to the people. The 4-year IMF reform programme is very important down this path. The independence of the CBSL has been assured already. It is done already. Once the Public Finance Management Act is in place, it will ensure predictability of the government’s budget deficit as well as debt stock beyond the predictability of interest rate levels. The parliament needs to enact that and establish these practices. Further, the Governance Diagnostic Report will be vital in this context as an assessment of the Anti-Corruption Landscape of Sri Lanka,” he said.