Sri Lanka to introduce new central bank law, inflation target

Sri Lanka will introduce new central bank legislation aimed at bolstering the bank’s independence, accountability and also price stability in the country via 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 key 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 start of last year, tipping the country into its worst financial crisis since independence from Britain in 1948.

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

A separate governing board, consisting of six members and the governor, will be formed in addition to the monetary policy board, he added.

“The main point of this legislation is to empower the central bank to make the right decisions, not popular decisions,” Weerasinghe said in a public speech on the new bill.

“With this new law a central bank governor can work independently and make decisions that cannot be changed according to the whims of the government in power.”

The central bank will be required 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 also be released from the mandatory buying of unsold treasury bills at primary auctions, which will reduce the amount of money it prints, the central bank chief noted.

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

(Reuters)