Doubts over take-over of key CB functions
Finance Minister Ravi Karunanayake’s budget proposal to take away some key functions of the Central Bank (CB) including public debt management has come under strong criticism from various quarters including the bank’s own officials.
It is said to be the worst incidence in the history of the banking regulator where its work has been undermined by a Finance Minister, according to one source. “Never before has the Central Bank’s role been compromised as much as we see what the Finance Minister is doing,” another official, who spoke on condition of anonymity, told the Business Times.
The issues in contention are three proposals in Budget 2017: Establishing a Consumer Financial Protection Authority (CFPA) which would control non-bank institutions including finance companies, creation of an independent Debt Office and the new National Payment Platform (NPP) to be managed and controlled by the Information Communication Technology Agency (ICTA).
On Thursday, opposition legislator Bandula Gunawardene said his lawyers were filing a public interest petition in the Supreme Court challenging the creation of a NPP outside the purview of the CB saying it’s a violation of the Constitution.
CB insiders say that the bank’s powers as per the Monetary Law Act is being further compromised. When the Government last year brought the CB under the purview of the Prime Minister, there were objections on the grounds that traditionally and historically the banking regulator operated under the Finance Ministry.
The Business Times has reported previously on two of the issues – separate debt office and the NPP. In an August 14, 2016, story the paper said the CB had intervened in the flawed process to set up the NPP at the ICTA. See http://www.sundaytimes.lk/160814/business-times/central-bank-steps-in-to-smoothen-flawed-payments-platform-project-204469.html
CB Governor Indrajith Coomaraswamy also raised similar concerns – on lack of consultation by ICTA – when he met the media in August. In its probe the Business Times found that in September 2015, Transact Lanka (Pvt) Ltd, a mobile payments and funds transfer service provider, was awarded a contract by the ICTA to develop the new payments platform. Transact Lanka issued a media statement on September 9 saying “ICTA has awarded and granted it permission to operate the Lanka Government Payment Service (LGPS) Web Portal to enable citizens to make cash-based payments for all government related payments”.
There are allegations that these deals are connected to some high-ups at the ICTA and a conflict-of-interests has emerged in making the selection.
“This is dangerous stuff. No country allows a payments gateway internally to be managed by private parties. Externally, gateways like Mastercard and Visa are well developed systems but internally it’s the banking regulator that controls payments,” the source said, adding that the privately-managed NPP could be at risk of hackers, putting thereby the country’s financial system also at risk.
CB insiders said taking away debt management is akin to taking over most of the functions of the banking regulator. “This (managing debt) is one of the primary functions of the Central Bank,” the source said.
Meanwhile the new unified debt management unit at the Finance Ministry is being set up primarily for transactions in government securities which could then be extended to other instruments including corporate debt securities known as debt exchanges.
Officials familiar with the process say it will facilitate the implementation of the government’s policy reforms under the proposed Sri Lanka competitiveness development policy loan by the World Bank (WB) and Japan International Cooperation Agency (JICA.).
This unit is to streamline and strengthen the management process in an efficient and transparent manner, it was revealed at the Cabinet Committee on Economic Management meeting held in Colombo in June this year.
In addition, the Department of Exchange Control, the Employees Provident Fund, the Staff Training College (based at Rajagiriya) and the Public Debt Department will also come under independent agencies in accordance with a cabinet proposal devised by the Ministry of Policy Development and Economic Affairs, the Business Times learns.
The government should institute a legal framework clearly specifying the objectives of its borrowing and the public debt management strategy, a well-known economist said adding that to avoid bond scams this legal framework should consist of both the primary and the secondary bond transaction legislation including the definition of public debt, debt management objectives, and borrowing purposes.