Mar 26, 2006 (LBO) – Sri Lanka’s central bank has to gain independence from the treasury, if it is to bring down inflation and protect the poor, a top Indian economist said. . Until the balance of payments crisis in the early 90’s forced the Indian government to open the economy and undertake major reforms, monetizing government debt by extending central bank credit was the accepted norm.
“RBI had become like a cookie jar, where the government, as and when they wanted, could just dip into the cookie jar and take what they wanted,” says Narendra Jadhav, Principal Advisor and Chief Economist of the Reserve Bank of India.
“But in 1993, there was a contract signed between RBI and the Ministry of Finance, which paved the way for the elimination of this automatic monetization. Over a 4 year period we eliminated the automatic monetization of the deficit.”