#AskWatchdog - 06

#AskWatchdog - 06

@July 27, 2022

Read this article in English | සිංහල | தமிழ்

Research by Umesh Moramudali Edited by Aisha Nazim Translated by Mohammed Fairooz & Nishadi Gunatilake

You asked:

Can the Central Bank function without a Finance Minister?

Our Answer:

Short answer: Yes. The reasoning behind it?

Although the Central Bank of Sri Lanka (CBSL) is assigned to the Ministry of Finance, it is headed by the Governor — who is appointed for a six year term by the President, upon a recommendation by the Minister of Finance.

The decisions of CBSL are taken by the Monetary Board which consists of five members. These members include the governor of the CBSL, the Secretary to the Treasury, and three other members appointed by the President on the recommendation of the Minister of Finance, with the concurrence of the Constitutional Council. The Monetary Board is vested with the powers, duties, and functions of the Central Bank under the Monetary Law Act, No. 58 of 1949, and is responsible for the management, operations, and administration of the Bank. According to the Monetary Law Act, Monetary Board is a body corporate with perpetual succession. This means, it is considered as a person before the law and the functions of the CBSL are not affected by the change of Finance Minister.

During the constitutional coup in 2018, CBSL continued to function in spite of the change of government and the then-Finance Minister. Dr. Indrajith Coomaraswamy, the Governor at the time, carried out his duties as usual.

Can we have a parliamentary election? What are the possibilities?

Our answer:

The current parliament concludes its term in August 2025. If a parliamentary election needs to be held prior to the conclusion of the parliament term, the current parliament should be dissolved. According to the constitution, there are two ways to dissolve the parliament. President can dissolve the parliament after the parliament has served two and half years of its term (Article 70 (1) (a)). This is not an option as the current parliament has not concluded for two and half years. Other option is Parliament by resolution requests the President to dissolve Parliament. Such resolution needs to be passed with a simple majority.

Another concern is how an election would delay the process of entering an IMF programme, which is essential to address current economic issues. For Sri Lanka to enter into an IMF programme, it needs to send a letter of intent to the IMF. Such a letter should specify the economic reforms Sri Lanka intends to carry out and should be signed by the Finance Minister and the CBSL governor. Furthermore, finalizing IMF staff-level agreement requires enacting some legislation pertaining to economic reforms (eg: Interim Budget, and change of tax laws). It is very difficult to do both without a functioning parliament. Therefore, dissolving parliament without entering into an IMF program could delay the negotiation with the IMF. Changing the government after entering into an IMF program would not halt the IMF programme as the IMF work with the state, not with individuals. In Pakistan, IMF continued its program despite the change of government. In July, IMF reached a staff-level agreement with Pakistan, after concluding seven and eight reviews under the recently appointed government.

If we were to hypothetically go for an election, the next question is whether Sri Lanka has sufficient money to fund an election. Although Sri Lanka has a fiscal deficit, the government continues to spend money on essential activities. Election commission data shows that the cost of the Parliamentary Election 2020 was Rs. 5,724 million. Even if the cost of an election is adjusted to inflation, it will cost us around Rs. 10 billion. Compared to other government expenditures, an additional expenditure of Rs.10 billion spanning across 02-03 months is not a significant additional burden to the government. To put things into context, for the period of January-April 2022, government expenditure was Rs.1,155 billion, of which Rs. 316 billion was spent on paying salaries. From a financial perspective, it seems that Sri Lanka can afford to conduct a parliamentary election.

The lack of fuel and other imported items required to conduct an election could also be a concern. However, the supply of essential items to conduct an election can be secured by prioritizing forex payments pertaining to the election. Even if we assume that 75% of the election cost is for import-related items, it will only require less than USD 25 million to finance election-related imports. Thus, difficulties to import cannot be considered a factor not to hold elections.

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