Central Bank Governor, Dr. Indrajit Coomaraswamy called on the public to be more aware of the proposed changes to the Monetary Law Act. He was speaking at the Central Bank Auditorium recently before an annual oration by political scientist and former advisor to the Ministry of Finance Razeen Sally.
Coomaraswamy said, “In modern central banking there is a strong conviction that there should be a separation, there should be coordination between fiscal and monetary policy, but you certainly don’t want fiscal dominance on monetary policy.”
“We have a very strong legacy of fiscal dominance. Such forbearance has not been helpful in terms of getting strong macro-economic outcomes in the economy. There are various monetary policy regimes that can be used. We don’t have the strength in the external sector to anchor the exchange rate. We have used monetary aggregates as an anchor for monetary policy for many years, but that relationship between monetary aggregates and inflation got weaker over time.”
The governor said that inflation targeting was already in place for the last five years. He said, “this is not a new thing, the Central Bank has been transitioning to a flexible targeting regime. We have pretty much transitioned. We are now a flexible inflation targeting regime. If the regime is embedded in the law as we would like it to be on the next day, nothing would change.”
He said “The biggest complaint policy-making in Sri Lanka is the lack of consistency. That is what everyone is saying. If the flexible targeting regime is embedded into law, then automatically you have greater consistency and predictability.”
He added “At the time the Monetary Law Act was written we had permanent secretaries. The Secretary to the Treasury was not a political appointee. Today, all secretaries are political appointees. It is highly questionable if you want a political appointee to the governance structure of the Central Bank.”
He said, “In future with the new Monetary Law Act the members of the governing board and the monetary policy board will be recommended by the Secretary of the Treasury with the concurrence of the constitutional council.”
“We probably have to raise US$ 3 billion a year for the foreseeable future. With Rating Agencies and international capital markets maintaining confidence is critical. We were able to raise US$ 2.4 billion 3 months after the political crisis through dollar-denominated sovereign bond issuances. One of the reasons we were able to do that was we were able to tell bond investors that there was such a monetary law act in the pipeline. There were fiscal rules in the country. Similarly, we were able to raise US$ 2 billion just two months after the April bombings. An important part of the narrative to the investors was that the legislature was in the making.”
Dr Coomaraswamy said the March and June government issuances were 3.5 times and 3 times oversubscribed respectively. “The (investor) confidence has been shown was due to the fact that we were moving to a clear framework for macroeconomic policy that was institutionalized. This Monetary Law Act is a groundbreaking piece of legislation.”
The Governor added thatin the future the governor will be answerable to parliament on the rate of inflation and in the near future the minutes of the meetings of the monetary board will be released with a time lag.
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