New Central Banking Act – Will it destroy or upgrade the country’s money and monetary system?
The media reported that the Cabinet, subject to further discussion of the views, approved a new Act as an improved version of the present Monetary Law Act (MLA) to facilitate operations of the Central Bank (CB) more effectively and efficiently in line with present requirements. The CB Governor repeatedly stated that new legal provisions would be introduced to grant the autonomy to the CB as a part of new macroeconomic management policy framework agreed with the IMF
As the proposed Act is not available for public information, it is not possible to comment on the efficacy of the new Act as compared to the MLA that has been tested for 72 years with several amendments introduced from time to time to the MLA without hurting the its policy framework. The architect of the MLA is John Exter, an Economist of the US central bank, the Federal Reserve System established in 1913.
Therefore, this short article, hoping that legal officers of the CB are smarter macroeconomists than John Exter to draft a new Act to replace the MLA, is released to highlight the macroeconomic management framework introduced through the MLA to drive the post-independent Sri Lanka for economic development through an independent monetary system in place of the Currency Board System.
Salient Features of the MLA
The salient features of the macroeconomic framework laid down in the MLA for independent Sri Lanka are as follows.The MLA was enacted to establish the monetary system of Sri Lanka and the Central Bank as the authority to administer and regulate the system and to conform and impose upon the Monetary Board of the powers, functions, and responsibilities necessary for the purposes of such administration and regulation and to provide for connected matters. Accordingly, the Monetary Board is the corporate body and is authorized to determine several policies or measures in the MLA in addition to vesting it with the powers and functions of the Central Bank where the Monetary Board is generally responsible for the management, operations, and administration of the Bank. Therefore, the Monetary Board is the monetary authority in the country. Therefore, the MLA first established the monetary unit for the country and entrusted it with the Monetary Board for administration and regulation in terms of policy actions authorized in the Act. Accordingly, the standard unit of monetary value in the country is rupee, represented by the signs “Re.” and “Rs” and divided into one hundred units, each of which is called a “cent”. Then, provisions have been made to determine the par value and parities of the rupee. Accordingly, the MLA creates means of payments within the monetary unit where currency notes and coins are created as the legal tender for payments. Currency is the financial liability of the Central Bank and issued on behalf of the government. The national monetary policy is stipulated with principles and rules to ensure that the monetary system is used for macroeconomic objectives stipulated in the MLA. In the monetary policy, the Monetary Board is empowered to regulate the supply, availability and cost of money by having regard to the monetary needs of particular sectors of the economy as well as of the economy as a whole and to maintain the par value of the Ceylon rupee and so to regulate its exchange with other currencies as to assure its free use for current international transactions. These have been stipulated under domestic monetary stabilization and international monetary stabilization. The most part of the MLA relates to actions authorized on the national monetary policy as the MLA governs the monetary system of the country. The Economic Research Department and Director of Economic Research were created in the Central Bank as independent authorities to research on money and banking and other economic subject of general interest to guide the Monetary Board in policymaking and for information of the public. As the monetary system runs on the banking system, Bank Supervision Department and Director of Bank Supervision were created in the Central Bank to supervise banks to promote their prudence and stability. The Monetary Board also was given wide powers to regulate banks and resolve problems banks including emergency credit facilities (or lender of last resort). This was necessary as there was no bank supervision framework in 1950. However, since 1988 the Banking Act has been in place, but MLA bank supervisions and regulation powers have been in prime use. The Monetary Board was empowered to establish any other Departments and branches, agencies and correspondents in other places in the country or abroad for the proper conduct of the business of the Central Bank. Initial four objects of the Central Bank in the MLA were as follows. The stabilization of domestic monetary valuesThe preservation of the par value of the Ceylon rupee and the free use of the rupee for current international transactionsThe promotion and maintenance of a high level of production, employment and real income in CeylonThe encouragement and promotion of the full development of the productive resources of Ceylon.
Amendments introduced in 2002 resulted the following two objects of highly conceptual context.Economic and price stability; andFinancial system stability, with a view to encouraging and promoting the development of the productive resources of Sri Lanka.
The Central Bank is charged with the duty of securing the objectives so far as possible by action authorized by the MLA.
It is seen that analysts in the Central Bank as well as outside lightly talk about the objectives of the Central Bank as economic and price stability and financial system stability in their win interpretations without making any reference to the text “with a view to encouraging and promoting the development of the productive resources of Sri Lanka” which is the condition imposed on the objectives.Several fiscal functions were assigned to the Central Bank to ensure that the fiscal policy evolves in harmony with the monetary system. Fiscal agent, public debt management, financial advisor, banker of the government and limitation of advances to the government are some of them. Certain powers are assigned to the Monetary Board to issue directions to state institutions on fiscal operations and approve foreign loans of the government. All these are to ensure that their operations are not impacting the monetary conditions of the economy regulated in the monetary policy. Annual Report, financial statements, profit and loss calculation, distribution of net profit and capital have been stipulated in the MLA. As the capital is fully owned by the government, it is a state institution. The Minister of Finance is authorized to issue directions to the Monetary Board as to the monetary policy of greatest possible advantage of the people of the country in view of the opinion of government while the government taking its responsibility.
In view of above highlights, it is necessary that the lawmakers fully understand the provisions of the MLA and its macroeconomic management framework legally implemented in Sri Lanka within the Constitution.
Some may comment that the current economic crisis is a result of lapses in the MLA to resolve new problems. It is not correct if the provisions relating to the macroeconomic management framework in the MLA are understood literally.
In fact, the economic crisis is a result of the failure of the Central Bank/Monetary Board to implement the monetary system in compliance with the MLA. The government debt and foreign currency problems are results of mismanagement of the monetary policy and fiscal functions in violations of the MLA.
Therefore, if the Monetary Board finds the MLA as the scapegoat and proposes a new Act to replace the MLA under the cover of the IMF, it is highly likely that the major provisions relating to the monetary unit, monetary system, banking stability, prudence of monetary policy instruments including their risks and diversity will be wiped out without any notice.
If the macroeconomic management framework set out in the MLA is lost, the monetary system including the banking system will confront havoc in due course and operations of the Central Bank will encounter conflicts on daily basis. This will delay the recovery of the economy for decades. In that instance, the present Minister of Finance who submits the new Act to the Cabinet and Parliament will be encrypted in the economic history of Sri Lanka.
I hope that at least one expert who is knowledgeable in the MLA and global central banking literature will read the new Act carefully to ensure that the monetary system advances without major disturbances and crises. I know that it does not happen in the Central Bank as officials are only concerned about drafting sections allocated to them in micro manner in office hours.
Since we do not have an expert like John Exter taking the responsibility of the new Act, somebody must be responsible for such a national task as lawmakers will not understand the technical meaning of any provisions in the Act, given their technicalities. Further, the relevant authorities must submit the Act to the Parliament with a report similar to the Exter Report carrying explanations for each provision.
It is highly advisable that if the new Act along with the Report is made available to the general public for information and comment because the proposed new Central Bank is not an institution belong to the new Monetary Board, but an apex public institution funded by the public to be responsible for securing the public confidence in Sri Lankan monetary unit and the monetary system behind it. This is because it is the elected government that should accept the responsibility of all policies of the state institutions.
(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)
Former Deputy Governor, Central Bank of Sri Lanka
(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles publish.
The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)