Independent central bank is for citizens and not for politicians

IN a recent talk show titled 'Modern Talk' hosted by Channel 7 television, successor to the former YA Television, the young talk show hostess Nimna Perera asked me whether the current central bank management had been doing its job properly in managing the economy.¹

- By W.A. Wijewardena

As a journalist, she was voicing the sentiments of the public openly in that talk show. There should not be objection to this approach because that is the duty of an anchorwoman by her viewers. In answering her question, I summarily told her that the central bank is an independent organisation as mandated by the new Central Bank of Sri Lanka Act or CBA and, under the mandate given to it by the new legislation, it is doing perfectly well in taming inflation and restoring the stability of the exchange rate. However, it requires further elaboration.

Three years ago, in 2022, inflation as measured by the Colombo Consumers' Price Index or CCPI was running on average at about 63% and the official exchange rate was unstable with a lucrative black market for foreign currencies. All indications were that Sri Lanka, unless proper policies would be adopted, would descend to a basket case like Lebanon. This did not happen because the central bank's management, with financial as well as policy support of the International Monetary Fund or IMF, was able to tame the rising inflation and keep the exchange rate at a stable level.

It was the IMF which insisted from time to time that the existing central bank law, Monetary Law Act or MLA, was defective because it permitted a governmental officer, Treasury Secretary, to sit on the decision-making body of the Bank, the Monetary Board, as a vote carrying member. Further, MLA permitted the Central Bank to finance the budget by buying Treasury bills issued by the Government from primary auctions. This facility, known as 'monetary financing', was liberally used by all finance ministers since independence reducing the Bank to a primary source of Government funding.