Amendments to Monetary Law Act to adopt flexible inflation targeting policy

• Amendments would also seek to improve governance and strengthen independence of Central Bank
• Provisions to strengthen financial sector oversight to be included

By Skandha Gunasekara

The Government is to bring amendments to the Monetary Law Act to facilitate the adoption of the flexible inflation targeting policy framework by the Central Bank.

Accordingly, the Monetary Law Act No 58 of 1949 will be amended to improve governance of the Central Bank andto strengthen its independence, as well as to implement flexible inflation targeting policy framework, to ensure sustained price stability in Sri Lanka, and to strengthen financial sector oversight.

As per the recent Cabinet memorandum submitted by Prime Minister Ranil Wickremesinghe, in his capacity as the Minister of National Policies and Economic Affairs, “The amendments are expected to update the Monetary Law Act in with international best practices in central banking, address issues identified in the Report of the Presidential Commission of Inquiry appointed to investigate and inquire into and report on the issuance of Treasury bonds during the period 1 February 2015 to 31 March 2016; and fulfil the structural benchmark under the Extended Fund Facility Program with the International Monetary Fund (IMF-EFF) that requires approval of the Cabinet of Minister on the key elements of the amendments to the Monetary Law Act.”

To improve governance of the Central Bank, the amendments would seek to minimise political influence on the appointment of the Monetary Board of the Central Bank, by subjecting the appointment and removal of the Central Bank Governor to a constitutional process.

The amendments will also introduce Codes of Conduct for the Governor, members of the Monetary Board, senior management and all other officials of the Central Bank.

The Cabinet memorandum notes that although the Central Bank had been successful in maintaining inflation in the single digits for the past nine years under the current monetary policy framework, it has become necessary, as a result of international practices and domestic developments, “to adopt flexible inflation targeting policy framework to consolidate this achievement going forward and ensure mid-single digit inflation over the medium term, thus supporting macroeconomic stability.”

The amendments would also include provisions to support exchange rate flexibility as “the experience of inflation targeting countries displays the importance of a flexible exchange rate and an intervention strategy in the foreign exchange market for the success of flexible inflation targeting. In this regard provisions are required to streamline the power of the Central Bank with regard to exchange rate management.”

The amendments will also include provisions restricting financing of the fiscal deficit by the Central Bank, fiscal-monetary coordination and to strengthen financial sector oversight.