Sri Lanka to introduce new central bank law

COLOMBO Sri Lanka will introduce new central bank legislation that will bolster the bank's independence, accountability and also strengthen the country's price stability through a new inflation target, its governor Nandalal Weerasinghe said on Thursday.

Sri Lanka is waiting for a $2.9 billion bailout programme from the International Monetary Fund IMF to be finalised on March 20, and establishing a fully independent central bank is one of the criteria for receiving the aid package.

Economic mismanagement coupled with the impact of the COVID 19 pandemic left Sri Lanka severely short of dollars for essential imports at the beginning of last year, leading the country into its worst financial crisis since independence from Britain in 1948.

Weerasinghe said that the finance minister and the central bank would agree on what that target should be and that the new legislation will prioritise inflation and introduce an inflation target.

He said that a separate governing board, consisting of six members and the governor, will be formed in addition to the monetary policy board.

In a public speech on the bill, Weerasinghe said that the central bank should be empowered to make the right decisions, not popular decisions.

With this new law, a central bank governor can work independently and make decisions that can't be changed according to the whims of the government in power. The central bank will have to issue an inflation report every six months and will need to provide explanations to a parliamentary committee on its performance as and when necessary, Weerasinghe said.

The central bank will be free of the mandatory buying of unworn treasury bills at primary auctions, which will reduce the amount of money it prints, the central bank chief said.

Sri Lanka will set up a separate entity to raise funds to settle its debt, removing that responsibility from the central bank once the new legislation is passed, Weerasinghe said.