Sri Lanka central bank independence hurt by law

July 19, 2010 (LBO) – A groundbreaking book by a former Sri Lankan central banker has shown how the institutions independence could be improved so that it can better resist fiscal and political pressure to print money and generate inflation. Economic analysts have warned that direct subscriptions to Treasury bill auctions is a ‘quantity easing’ exercise, that undermines a open market operations and policy rates sanctioned transparently by the governing Monetary Board of the institution.

“The Central Bank is the banker to the government,” the book said. “The banking operations by the government cause difficulties in controlling money supply.”

“The Secretary to the Treasury is an ex-officio member of the Monetary Board.

“He or she should be able to refuse the demand from his or her own institution fro financing the fiscal expenditure and lowering interest rates, especially during high budget deficits.”

Other analyst have gone further and have pointed out that due to the traditional method of making monetary policy decisions by consensus the Treasury secretary is able to veto decisions to raise interest rates when budget deficits or inflation increase.

Analysts say other reforms that could reduce the inflation g