Sunday, April 14, 2024

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New Central Bank’s Board Governance – A change of the pillow for the headache?

When I was reading provisions in the new Central Bank Bill relevant to two new Boards proposed for the new Central Bank, it reminded me of the minute placed by Mr. A S Jayawardena on the top of the first page of the proposal for the current Monetary Policy Committee submitted to him by the Economic Research Department in 2001 in line with Central Bank Modernization program of the World Bank. It was a new technical mechanism proposed to help the Monetary Board to make monetary policy decisions on better macroeconomic grounds.

His minute was, “Approved. This seems like හිසරදයට කොට්ටෙ මාරු කිරීමක්!” The English version reads as ” a change of the pillow for the headache.”

The new bill proposes two Boards for the Central Bank. Those are the Governing Board and the Monetary Policy Board.

This short article, the third in the series, shows that the proposal for the two Boards is not only a change of the pillow for the Central Bank headache but also unacceptable in public governance and accountability principles and will destabilize the Central Bank as well as the economy. 

A few glaring 21 issues are presented below. However, technical issues relating to powers, functions and responsibilities of the two Boards with regard to objects, powers, duties and and functions of the Central Bank as set out in the section 7 of the bill are not covered in the article.

Governing Board (GB)

Role – Overseeing the administration and management of the affairs of the Central Bank and the determination of general policy of the Central Bank other than the monetary policy

Composition – 7 members, Governor as the Chairman and 6 other members who have expertise in economics, banking, finance, accounting and auditing, law or risk management

Fitness and propriety criteria – Sections 17 and 15(2) of the bill

Monetary Policy Board (MPB)


  • Charged with the formulation of monetary policy of the Central Bank and implementation of a flexible exchange rate regime in line with the flexible inflation targeting framework in order to achieve and maintain domestic price stability.
  • Regulate the supply, availability, and cost of money, taking into account the macroeconomic and financial condition of Sri Lanka.

Composition – 11 members, Governor as the Chairman, 6 GB members, two external experts in economics or finance and two Deputy Governors (DGs) in charge of price stability and financial system stability.

Fitness and propriety criteria – The section 17 and 15(2)of the bill.

Public Accountability Issues

I wish to present 21 glaring issues as listed below.

1. Fitness and propriety criteria prescribed for members of the GB and MPB and externally appointed DG are largely taken from the section 42(2) of the Banking Act. However, the second item, 42(2)b), in the Banking Act has been unreasonably amended in the Central Bank Bill in the 17(2)(a) as follows.

  • “has committed or has been connected with the commission of, any act which involves fraud, deceit, dishonesty or professional misconduct.”
  • However, the Banking Act sections 42(2)(b) reads as follows; that there is no finding of any regulatory or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that such person has committed or has been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct; 
  • Therefore, the Banking Act provision has been amended with hidden motives. Accordingly, the source to establish the evidence on committal of fraud, deceit, dishonesty or professional misconduct has been omitted. The reason could be to hide several findings of the Bond Commission 2017 on the conduct of the present Governor as the DG at that time that the Commission considered as instrumental in the questioned acceptance of bids at the 30-year bond auction held on 27 February 2015. Raising policy rates in the morning by removal of second tier deposit facility interest rate of 5%, accompanying the then Governor to the Public Debt Department at the time of the bond auction and associating with the Governor to instruct the Superintendent of the Public Debt to accept bids up to Rs. 10 bn and closure of private/direct placement window are the reasons cited by the Bond Commission to determine the dishonesty in public duties and improper conduct of the present Governor as the then Deputy Governor that aided and abated the then Governor to decide acceptance of bids worth Rs. 10 bn.
  • Therefore, if the 17(2)(a) is correctly incorporated, the present Governor cannot be elected as the Governor of the new Central Bank. This could be the reason to take only a part of the Banking Act provision.
  • Therefore, 17(2)(a) in the present form is meaningless as the source of evidence is not stipulated.

2.  Another two fitness and propriety items proposed in the bill just copied from the Banking Act are as follows.

  • “subject to an investigation or inquiry consequent upon being served with notice of a charge involving fraud, deceit, dishonesty or other similar criminal activity, by any regulatory authority, supervisory authority, professional association, commission of inquiry, tribunal or any other body established by law, in Sri Lanka or abroad.”
  • “has been convicted by any court in Sri Lanka or abroad in respect of a crime involving dishonesty or committed in connection with financial management or of any offence involving moral turpitude.”
  • If the first one is followed, even any FR case prevailing against a person will disqualify him/her, notwithstanding a person is treated as innocent until convicted.
  • Reference the second item, it is noted that the present President of the European Central Bank, Christine Lagarde, was convicted in December 2016 by a French Court on a corruption case relating to a sale of a state property in her capacity as the Finance Minister, but continued as the MD of the IMF and later appointed as the President, European Central Bank, despite the conviction on criminal charges over corruption on public property. Therefore, someone might question the specific importance of such fitness and propriety items in Sri Lanka, especially when persons are politically fixed in court cases by the state authorities or private parties for the revenge and to prevent their carrier progress. Further, if the President pardons, such convictions will be null and void. If the country’s President and lawmakers can be appointed without such criteria, its specific importance to the Central Bank or any other state institutions must be explained.
  • Further, the criteria should cover even to prevent the continuation of the offices of elected members if they become subject to any item in the criteria at any time after the appointment as in the case of Banking Act.

3. Two external experts appointed to the MPB can be any two who are conversant in economics or finance without any limitation on their present professions. If both members are from finance field employed in banks or business firms, they will not have any idea of monetary policy principles and practices and they will get the monetary insider information to thrive their business operations. Therefore, avoidance of conflict of interest has not been provided for in the bill.

4. There is no interpretation or criteria as to how a person qualifies to be an expert in the MPB or expertise in the GB, i.e., academic qualifications, professional exposures and specific contributions to the country. Therefore, anybody with some education and business experience can qualify for selection where members will be just sitting members and the Governor will run the show as at present.

5. Two DGs in the MPB are not fit due to two governance concerns. First, they are appointed by different authorities on different grounds for different duties (executive) in internal management. Second, they are subordinates to members of the GB. Third, as they are subordinates of the Governor, they will always go along with the Governor and, therefore, the Governor can dominate the MPB through acting in concert with the two DGs.

6. Two DGs mentioned as being in charge of price stability and financial system stability is questionable whether they are really in charge of those two stability areas or two objects of the Central Bank and thereby accountable for such stabilities. Therefore, the provision appears to imply that two DGs are the officials solely responsible for the Central Bank’s two objects eventually as no one else, GB or MPB, is responsible for the objects. Further, section 6(1) of the bill is for domestic price stability and, therefore, the legal ground for a DG to be in charge of price stability and its scope are questionable.

7. As the Senor DG is designated by the Minister, the appointment of another DG by the GB to act as the CEO of the Central Bank in the absence of the Governor and Senor DG is not lawful.

8. Giving a maximum of 45 days’ time to keep the office of the Governor vacant is poor public accountability.

9. None of the GB and MPB has any responsibilities for two objects of the Central Bank, domestic price stability and financial system stability which are not even interpreted. Therefore, the responsibility appears to be with a legal person which is the Central Bank whereas the Central Bank is not a responsibility of any natural person. In that case, two DGs could be held responsible for the two objects of the Central Bank as they are declared to be in charge of the objects.

10. As per section 6(3) of the bill, the Central Bank shall support the general economic policy framework of the Government as provided for in any law. However, who makes relevant decisions in the Central Bank whether the Governor or GB or MPB is not stipulated in the bill whereas the general economic policy of the government also is not interpreted.

11. Governor chairing both Boards while performing as the CEO is bad for modern corporate governance as the Governor dominates both board governance and internal operations governance. In good corporate governance, the CEO, the Chairman of the Board and Chairmen of Board Committees are separate persons. Therefore, it the Governor is to dictate all operations of the new Central Bank, the rationale and specific accountabilities should be set out in the law. For example, it the Central Bank becomes insolvents as provided for in the section 97 of the bill, the Governor should be at the top of the accountability list.

12. Assets, liabilities and profit and thereby the solvency of the new Central Bank are largely dependent on monetary policy decisions of the MPB. However, members of the MPB are no responsibilities on financial performance and conditions of the new Central Bank. In the event, major monetary policy decisions are taken by the majority MPB members, GB and MPB may confront conflicts as financial operations inclusive of annual budgeting fall within the general policy responsibility of the GB.

13. Section 8(8) covers the GB to make such rules as it may consider necessary in relation to any matter affecting or connected with or incidental to the exercise, performance and discharge of the powers, duties and functions of the Central Bank where implementation of the monetary policy is one such duty of the Central Bank. Therefore, the GB can supersede the decisions of the MPB. Such conflicts between the two Boards may destabilize the Central Bank and economy.

14. The Governor to accept positions in academic/research organizations or memberships in investigation commissions as provided for in section 14(6) is a conflict of interest and the Governor will have undue personal opportunities. 

15. In the event, the new Central Bank becomes insolvent, members of the GB and MPB should be removed from the office as they should not be members of the Boards or executive cadres of insolvent institutions at the time of appointment to GB and MPB.

16. Age limits are not specified for members of the GB and MPB. However, age of persons to be appointed as DGs is determined by the GB.

17. Discrimination of appointment as DG between employees and outsiders and non-application of fitness and propriety criteria for employee DGs by legal provision are not in good governance. A DG is a statutorily prescribed post in the Act for public duties and not a promotion for retiring Central Bank employees friendly to the Governor to enhance retirement benefits.

18. The GB as an operational policy Board to have meetings monthly whereas the MPB that drives the Central Bank’s economic policies to have meetings once in three months cannot be rationalized. 

19. A term of office of 12 years for elected members of the GB and MPB as per section 16 of the bill is excessive and contradictory to diversity and new knowledge, given the maximum age is not prescribed unlike 70 years for directors of licensed banks regulated by the Central Bank. Therefore, Governor and elected members can built their monetary kingdoms detrimental to economic and political stability of the country.

20. The bill is silent on the responsibility of the GB and MPB on foreign exchange operations of the Central Bank that crucial for domestic price stability and financial system stability. Therefore, the Governor will run that area at his discretion.

21. The conflict can arise between the GB and MPB as to who have the prudential regulatory and supervisory duties over the licensed financial institutions, especially as the Bank Supervision Department and Director of Bank Supervision have been dropped in the new bill. As the MPB has the purview to regulate the supply, availability, and cost of money, taking into account the macroeconomic and financial condition of Sri Lanka, MPB can intervene in regulation and supervision duties of the Central Bank.

Concluding Remarks

Given the confusions and conflicts relating to provisions of the new bill, the new Central Bank will continue to operate as it is now without any feeling of the pillow change. Violations will be a regular course everyday as at present as no one has information to question them.

As the Central Bank has the sole monopoly to print currency as the legal tender and it has a versatile policy jargon and rhetoric used internationally that nobody is bothered to understand or question, the existing bureaucratic process will prevail on the new pillow of the Central Bank Act.

For all practical purpose, the Governor will show the show surrounded by 10 people in two Boards in the new Central Bank, instead of 4 people in one Board in present Central Bank. Therefore, same headache to the public will prevail on the new pillow.

Abrupt changes in laws to cover up negligence and failures of public duties by officials and to attempt rebranding of such officials will be catastrophic to the economy and public.

My previous two articles in the series covered;

  • The breakdown of the sovereign monetary unit of the country by the new bill
  • The independence of the new Central Bank is not different from what is at present for all practical purposes, other than the new Central Bank is a bank owned and funded by the government to take risks of private financial institutions.

The next article will cover the public accountability of the monetary policy of the new Central Bank as provided for in the new bill.

(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.)

P Samarasiri

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)

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