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ECONOMYNEXT – Provisions for independence was also available in Sri Lanka’s old central bank law but qualified people with integrity is needed to exercise provisions legal provisions, Governor Nandalal Weerasinghe said.
Provisions for independence was “already available in the earlier act” Governor Weerasinghe told on online forum organized by UK-based Oxford Global Society, but there were weaknesses in “governance and process of appointments”.
Governor Weerasinghe, a longtime staffer, was bought back by then president Gotabaya Rajapaksa in April 2022 amid the worst currency crises triggered by the agency.
Considered to be “fiercely independent” by many in the financial sector, he hiked rates, allowing interest rates to be market-priced within days and effectively halted the currency crisis by September 2022, using provisions in the old law.
The new law has separate Boards to run the agency and take monetary policy decisions.
“If you see governing board or central bank board people appointed coming with some time political influence without proper exposure, suitability, integrity, then obviously whatever the process, it would lead to trouble,” Governor Weerasinghe said.
“Some can study, there is a lot of evidence.
“This is where in the new Act, in the law, there are strong provisions to prevent that happening, in terms of governance, independence, accountability, in terms of appointment of the people to the governing boards, monetary policy boards and also the checks and balances and accountability.
“We hope those provisions will be appropriately used going forward… In my view you can provide the text, but it is up to individuals to exercise.”
“I am confident that the new law has sufficient necessary provisions to ensure central bank independence.”
Appointments have to be ratified by a Constitutional Council.
There has been concern over at least one appointment made by the current process, including some rumblings in parliament, earlier this month.
Other classical economists have pointed out that the monetary doctrine followed by an agency determines whether a country has stability and can avoid currency crises or not, regardless of whether it is ‘independent’ of political authorities.
In countries with chronic monetary instability no fundamental change takes place, due to doctrinal confusion.
READ MORE: Gate keeping and status quo bias in monetary reform explained to Sri Lanka by top economist
A central bank which tries to boost growth by printing money, regardless of whether it is independent or not will trigger high inflation and instability, as shown by so-called ‘independent’ central banks in the West.
READ MORE: Sri Lanka warned on dangers of new central bank law
Concern has to been expressed about the excessive legal discretion given under the new law, a US-style dual mandate by bringing potential output into the law, undermining its stability as well as weak accountability provisions.
Many East Asian central banks including Singapore, has the Finance Minister as the Governor who do not believe in using monetary policy as a tool to boost growth and trigger crises but only it as a tool to provide stability for economic agents to work, analysts say.
In some stable East Asian nations which have stable exchange rates and largely use it as the monetary anchor, the Governor is a member of the cabinet. (Colombo/Oct29/2023)
