Treasury secretary on CB board `no threat to independence'

Sri Lanka has told the International Monetary Fund (IMF) that having the country’s treasury secretary on the Central Bank’s five-member monetary board does not hinder its ability to act independently even as criticism grew that the bank was pressured into printing money by the treasury to support the financially over-extended government.

“There is no evidence that the presence of the secretary to the treasury in the governing board of the Central Bank carries the risk of conflict of interest and lack of independence,’ said K.G.D.D Dheerasinghe from the Central Bank in an official reply to the IMF’s recent assessment of Sri Lanka’s socioeconomic policies.

“In fact, his presence on the Board has helped to ensure consistency in policy and close co-operation between the Central Bank and the Ministry of Finance,” Dheerasinghe told the IMF in the government’s reply which was made public by the IMF recently.

The Central Bank’s Monetary Board has the power to make all policy decisions relating to the management, operation and administration of the bank. It comprises five members and is headed by the bank’s governor. The treasury secretary and three non-executive officials appointed by the President are the other members. Policy decisions are made only if three of the five members concur, but some rulings require a unanimous vote.

Sri Lanka’s strong justification for having the treasury secretary on the Central Bank’s board came as the IMF became the latest to join a chorus of public and private sector experts, and the general public, in criticising it for veering from its stated goal of maintaining single-digit inflation in 2007.

Inflation, which slowed until June 2007, has since picked up in tandem with the Central Bank printing billions of rupees to finance the Government’s budget deficit. Colombo inflation jumped 4.4 percent from the previous month in November, according the data released recently by the Census and Statistics department. Year-on-year inflation was 19.6 percent in November, the department said. The government interestingly attributed the double-digit inflation to it taking a more market friendly approach in fixing prices rather than to an increase in central bank credit to the government.

Certain administered prices were raised and subsidies on diesel and kerosene prices were removed, Dheerasinghe said in the report. He acknowledged on behalf of the government, however, that inflation needs to be controlled.

“Policy interest rates were raised by 50 basis points during the year whilst resorting to aggressive open market operations to maintain market liquidity at a desired level,” said Dheerasinghe. He added that the Central Bank had managed to meet its reserve money targets in the first nine-months of 2007 after adopting a tight monetary policy.

The central bank has not raised its policy rates since February 2007 despite the country recording double-digit inflation.