New Central Bank law could finally see the light of day prior to IMF deal

„Draft law could see Cabinet and Parliamentary passage within weeks

„New law an important prior action

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The new Central Bank Act will soon see passage through the Cabinet and Parliament as the final draft remains ready as part of a broader package of things to be met as prior actions required to unlock the International Monetary Fund (IMF) deal to pull the country out of its current economic mess.

The new Act will further strengthen the Central Bank independence and thereby will curb monetary financing of the budget which is referred to as money printing in common parlance, putting a check on inflation produced by fiscal dominance over the monetary policy.

With most prior actions including but not limited to revenue enhancing policies, market pricing of energy and the commitment to restructure loss making state-owned enterprises have been either already implemented or embarked upon, the enactment of the new Central Bank law still remains.

“Almost all prior actions have been done. Only thing remaining is the Central Bank Act which is waiting to be passed by the Cabinet,”the Central Bank Governor, Dr. 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 added 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, espousing what they called 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.

Dr. Weerasinghe explaining where the clear lines of authority stand said while 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.

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.