New reforms to create win-win situation for Central Bank & Treasury

Nov 24, 2017 (LBO) – Proposed Liability Management Act and recently introduced market-based Treasury bond auction system will create a win-win situation for both the Central Bank and the Treasury, Central Bank Deputy Governor said.

Deputy Governor Dr. Nandalal Weerasinghe said these two measures in future would also insulate monetary policy from fiscal dominance.

He said the provisions of the proposed Act would facilitate the treasury to raise the required funds at the least possible cost from a more sophisticated securities market at competitive rates.

“Proposed Act allows the treasury to create a buffer fund to make the expenditure in the following year eliminating the necessity for the Central Bank to provide advances to the Treasury at the beginning of each year,” Weerasinghe said.

Speaking at a function held recently, Weerasinghe said it will also help the Central Bank to achieve its primary objective of price stability.

He said the recently introduced rules based and transparent Treasury bond auction system has not only reduced sharp volatility in securities but also corrected the distortion between the policy rates and market interest rates.

“It has also helped reduce monetization of the fiscal deficits through purchasing Treasury bills for the Central Bank at primary auctions as what happened earlier,” Weerasinghe said.

“So, Central bank treasury bill holdings have declined drastically from more than 330 billion rupees at the beginning of this year to around 30 billion now.”

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