Central Bank ensures macro- economic stability, Governor says
While defining monetary and the fiscal policy would be easy it is more difficult to define under whose purview such policies fall, said Ajith Nivard Cabraal, Governor, Central Bank while delivering the 18th Annual Taxation Oration of the Institut of Chartered Accountants of Sri Lanka held in Colombo this week.
He spoke on the topic “Harmonizing Fiscal and Monetary Policies to deliver sustainable Growth and Stability” and discussed entirely the government’s economic achievement.
He said that monetary policy is how the Central Bank achieves macro-economic stability while fiscal policy is the framework that is implemented to influence economic activities through allocation of resources to achieve goals of stability and growth.This policy is implemented by the Ministry of Finance in Sri Lanka with taxation, government expenditure and borrowing and debit management.
In his explanations of various powers of the Central Bank, Mr. Cabraal extensively quoted the late John Exter, a US economist. In 1948 Mr. Exter was seconded by the US government to advice the government of Ceylon on the organization and the functions of a Reserve Bank for Ceylon. Mr. Exter fulfilled this mission and was then appointed the first Governor of the Central Bank of Ceylon in 1950.
Mr. Exter’s report now serves as the most important and authoritative resource for Central bankers in Sri Lanka, Mr. Cabraal said and any issues or clarifications are sought through this report. Based on Mr. Exter’s report and findings the Monetary Law Act (MLA) No. 58 of 1949 was enacted.
The MLA has been designed to ensure the Central Bank functions as an independent body, with autonomy to implement its policies, which have far reaching implications for the people.
Mr. Cabraal said there is no fine line separating monetary policy from other policies, such as fiscal and trade policies. The Minister of Finance through his fiscal policy or the Minister of Trade through his authority to control imports and exports can exert a powerful influence on monetary conditions. But it is the clear intent of the law to concentrate, in so far as it is considered practical and constitutional to do so, as much monetary authority as possible in a single regulatory operating agency – the Central Bank.
The Exter report, Mr. Cabraal says elaborates the thinking behind the MLA and noted, that “in a small country like Ceylon it is clearly advantageous to place the responsibility for coordinating the activities of all government credit institutions in the Monetary Board of the Central Bank. The Board determines monetary and credit policy in general, and should have some means of ensuring that the policies of other credit institutions conform.”
Mr. Cabraal says Exter explains the position of the Governor, and the need for the Governor to be independent. He says, this position is assured by the fact that the Governor is appointed for a 6-year term and cannot be removed from office, unless he has done any act, which in the opinion of the Governor General (now the President) is of a fraudulent or illegal character, or is against the interest of Central Bank. He indicated that the Exter report discusses the limitations of the Governor and on the vital importance of harmonizing between the government policies and the Central Bank policies. He says Exter in this regard indicated that here are, however, many important problems of monetary policy, especially those relating to fiscal policy, on which a central bank must necessarily work in close harmony with the Government.
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