The new Central Bank Act will soon pass through the Cabinet and Parliament as the final draft has been drafted as prior actions required to get the International Monetary Fund (IMF) board approval for US$2.9 loan package to to met the country’ current economic crisis.
The new Act will further strengthen the Central Bank independence and thereby will control monetary financing of the budget which is referred to as money printing while controlling inflation, Central Bank Governor Nandalal Weerasinghe said.
The enactment of the new Central Bank law has become an urgent priority which ha sto be fulfilled as most prior IMF commitments including revenue enhancing policies, market pricing of energy and the restructure loss making state-owned enterprises have been either already implemented or embarked upon.
“Almost all prior actions have been completed. Only thing remaining is the Central Bank Act which is waiting to be passed by the Cabinet,” the Central Bank Governor, Nandalal Weerasinghe said.
“The final draft is ready and I think once we get that we can submit it to Parliament after getting the Cabinet nod. I think we can do it within the next couple of weeks,” he told a media conference last week.
The process to reestablish Central Bank independence via a new Act was started many years ago but failed to see the light of day after the Rajapaksa administration which returned to power in 2019 abandoned the process
The previous Gotabaya Rajapksa regime has resorted to an alternative economic policy where the unrestrained fiscal deficits were funded through the Central Bank under what many referred to as the Modern Monetary Theory.
Weerasinghe said Parliament remains the ultimate authority over the fiscal policy, which takes decisions on how the revenue is raised and how that revenue is spent.
The Central Bank has to be independent in deciding on the monetary policy which affects the entire country and not just the government, he pointed out.
While there are provisions in the current Monetary Law Act which ensures the independence of the Central Bank, the instance where that could be compromised is when the Central Bank is compelled to fund unrestrained budget deficits run by governments, a condition referred to as fiscal dominance over the monetary policy.
However, Weerasinghe emphasised that while the Central Bank is required to remain independent, both monetary policy and the fiscal policy must be complementary for effective economic outcomes.