Treasury to take over key role of Central Bank

Responsibility of raising money for government debt taken away

In a significant move, the Central Bank is to be relieved of its traditional role of raising money to finance government debt – an issue that came to the fore with the tainted 2015 Treasury bond saga.

Henceforth the Treasury will be assigned this role of raising funds for the Government, without asking the Central Bank to act as its agent, as being practised now. In other significant amendments proposed to the Monetary Law Act (MLA), provision is to be made to minimise political influence of the Monetary Board and subject the appointment and removal of the Central Bank Governor to a constitutional process. Currently the Governor is appoint- ed by the President on the recommendation of the Finance Minister.

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

In that controversial 2015 Treasury bond development, the Central Bank, under the governorship of Arjuna Mahendran, increased a bond issuance of Rs. 1 billion to Rs. 10 billion to finance government infrastructure settlement bills. The deal turned sour after it was claimed that the only one primary market dealer – Perpetual Treasuries Ltd owned by Arjun Aloysius, son-in-law of Mr. Mahendran – had inside knowledge of the change and was favoured in the bids.

According to reliable official sources, who declined to be named, this change and many others will be included in the proposed amendments to the Monetary Law Act. Raising funds for the government through local and international bonds, and Treasury bills has been a traditional role of the Central Bank but in recent times the Bank has tightened its procedures to minimise the issues that were raised during the 2015 transactions. However, the sources declined to comment on whether the move to remove this function from the Central Bank was connected or not to the tainted 2015 bond issue, but noted that the banking regulator would be primarily involved in inflation targetting.

The legal and accountability framework included in the proposed amendments provides greater independence and accountability to the Central Bank.

At present the Central Bank is required to buy Treasury bills in the primary market at times without considering monetary conditions. It is also compelled to provide credit to the government through provisional advances of 10 percent of the esti- mated state revenue each year.

However, the banking regulator would purchase T-bills for its own open market operations, he said. It would maintain Treasury bills in its stocks to meet the market conditions and liquidity situations, he added.

The amendments will be presented to Parliament early next year in an effort to suit flexible inflation targeting (FIT) framework. Cabinet approval to amend the MLA was obtained in April 2018 and the Act is currently at the draft stage.

According to a Cabinet-approved policy note, the key elements of the MLA amendments include, among others, setting price stability as the Bank’s primary objective, ensuring operational autonomy by removing the Finance Ministry's voting rights in the monetary policy formulation process, and restricting the Bank’s financing of the fiscal deficit.

This also means that the Monetary Board will be restructured sans the traditional inclusion of the Treasury Secretary on its board, giving it more autonomy. A few years ago, there were attempts by the Finance Ministry to influence decisions taken at the Monetary Board through its representative.