By T Lalithasiri Gunaruwan Professor in the Department of Economics University of Colombo

The Government has Gazetted a Bill to repeal the existing Monetary Law Act, which is presently Governing the Central Bank of Sri Lanka (CBSL), and to replace it with a new Central Bank of Sri Lanka Act. The purpose of this new Bill is to make the CBSL an autonomous entity, as per the Clause 5(3).

While it is acknowledged that any undue intervention into internal management of any Statutory body, including regulators, is undesirable, and therefore should be prevented, the scope for legitimate policy intervention by the Executive of the Country and also by the Legislature should be preserved and upheld. This imperative requirement of democratic governance appears to be disregarded in the subject bill.

Policy making” is the purview of the people. They endeavour to change policies and /or continue with the prevailing policies through democratically elected agents”, namely the Parliament (the Legislature) and the Cabinet of Ministers (Executive). Economic policy is of no exception. The sovereignty of the people to make/sustain/change policies will be badly impacted if one part of the economic policy”, namely Monetary Policy”, is detached and removed” away from the reach of the people’s sovereign representatives”. Clause 5(4) prevents CBSL seeking instructions from anybody, including Cabinet / Parliament, which is a clear violation of Parliamentary control of public finance (Article 148).  Besides, as per this provision in Clause 5(4), when read with clause 85, the possibility of the CBSL becoming an organ functioning under the advice of international bodies”, could not be excluded.  Therefore, it is my opinion that the Clause 5 of the Bill violates people’s sovereignty.

The Clause 6 appears to have been conceived on a theoretical/conceptual premise which considers price stability” as a supreme policy objective”.  However, it is not rational to believe that other macroeconomic policy objectives such as growth, equity, employment level, etc, are of any less importance.  Keynesianism, for instance, suggests that public expenditure could drive effective demand, which (fiscal policy) may be desirable under sluggish economic conjunctures to stimulate growth, regardless of their possible inflationary effects. Therefore, there is no conceptual rationale to suggest that price stability” (or, in other words, inflation control) objective is of any superior importance compared to such other macroeconomic objective.

The economic policy” is a composite package, and one part of it, namely monetary policy” cannot be removed from it and assigned to an independent body” which stays beyond the control of the overall economic policy making”.  Fiscal policy, which is not within the CBSL’s purview, for instance, may necessitate government borrowings”. When the Government borrows, it influences interest rates (if borrowed locally), and exchange rate (if borrowed internationally). Thus, fiscal policy directly affects monetary system. Similarly, if CBSL raises interest rates unilaterally (under the powers intended through this ACT), it will push up interest cost” of the already existing debts stock of the Government, thus affecting its fiscal expenditure. Therefore, it is very clear that both monetary policy and fiscal policy have to work hand-in-hand, without any separation” of authority. If separated, one integral part of the policy system becomes dislodged, and even the remaining part will become uncontrollable”.

Therefore, any policy formulation in regard to achieving macroeconomic objectives has to be essentially an overall endeavour, and compartmentalising price stability”.  Granting powers to CBSL to unilaterally make monetary policy interventions without any overall harmonious control”, as apparently envisaged by this Bill, could result in conflicting situations within the system. Therefore, it is my opinion that separating the policy making function pertaining to monetary policy dimension autonomous” from other macroeconomic policy making organs of the Government, can be sub-optimal, if not very harmful.

As per the Clause 26(1) of the Bill, it is required that the Minister and CBSL shall sign an Inflation Targeting Agreement”. But, nowhere in the Bill, is there any provision for the Minister to give his opinion / instructions/overall policy guidelines to the CBSL, and as per the clauses 5 and 6 of the Bill, the Minister cannot instruct/direct or influence the CBSL. The Clause 28 merely provides for the CBSL to inform the Minister” through its reports about the economy and policies adopted by the CBSL and also on the impending conjunctures. These provisions, read together, are tantamount to pushing the Minister to become submissive to a policy determined by the CBSL” while being a mere receptor of post-implementation information”.  Besides, Clause 84 of the Bill appears providing for the CBSL to advise the Government”, but there is no provision that the Government could advise the CBSL”.  This could amount to the Executive surrendering to a Statutory Body, and, therefore, cannot be considered as desirable.

Confidentiality clauses, enumerated under Clauses 10 (1), and 13(8), also raise concerns when read together with Clauses 7(1), which gives powers to determine” and implement”, without having to receive any directives/instructions/guidance [Clauses 5 and 6] from even the Legislature and Executive. The question therefore arises as to whether the decisions pertaining to functioning of a central economic organ of the country could be hidden” from the general public, at least until their implementation.

Clause 47(2) is of particular relevance in this regard. This is because, it appears to be enabling the CBSL to authorise any currency other than the Sri Lankan Rupee as legal tender for transactions within Sri Lanka, with complete confidentiality” under Clauses 10(1) and 13(8), and on unilateral determination, as per Clause 7(1). This provision could give rise to a violation of sovereign rights of the people of Sri Lanka when such authorisation of any other currency than Sri Lankan rupee for transactions within Sri Lanka, or in any part of the country, could be effected by the CBSL with no approval sought, or no intervention made, by their democratic agents, namely the Parliament or Cabinet of Ministers, being possible, as per the Clauses 5 and 6 of the Bill.

This concern would not arise if the powers of the CBSL are made limited to analysis”, formulation of policy perspectives”, and making recommendations” to the Government, thus enabling the Executive, and also the Legislature, as it may be appropriate, to make the final decisions prior to implementation. Such provision would not only make the decisions transparent, but also will take care of the sovereignty of the people.

It is pertinent to note that economic policy”, though a very important dimension, is not the sole concern of a nation. There are many other strategic objectives, including, inter-alia, social welfare, regional development, international relations, geopolitics, national defence, environmental protection, and above all, the sustainable national sovereignty. Economic policy decisions will inevitably have a direct bearing on each of these important strategic dimensions. It is in that respect that the provisions in the Clause 37 of the Bill, which appears to be giving unilateral carte-blanche power for the CBSL to deal with the nation’s Foreign Exchange policy, with no check or balance to enable the parliament / Executive to intervene in national interest, cannot be considered desirable.

Last, but not least, it can be observed that there is no explicit clause in the Bill to the effect that CBSL’s policies/implementations/action shall always be in accordance with the national economic sovereignty of Sri Lanka”; economic sovereignty being an essential component of national sovereignty. This could pave the way towards CBSL’s autonomous and independent policy decisions” be guided by anti-national drivers, and against national economic sovereignty interests”.

Even if the overall object of the Bill, and particularly its Clause 5, is to ensure that the CBSL would be able to function professionally with no undue influence from external forces, the absence of a specific proviso to enable the Executive and the Legislature to provide policy instructions”, within which the CBSL’s professional functions should be performed,  is a clear and substantive lacuna in the proposed Bill.  The proponents of the Bill could consider introducing appropriate provisions to that effect, in order to rectify this lacuna, and to ensure that the supremacy of the people’s policy making sovereignty exercised through their democratic representatives, namely the Parliament and the Cabinet of Ministers, is upheld.

11^th March 2023