15 December 2022 02:35 am Views - 1207
Dr. Nandalal Weerasinghe
PIC BY KITHSIRI DE MEL
By Nishel Fernando
The proposed strengthening of the Fiscal Management Responsibility Act (FMRA), which would require strict compliance with the fiscal targets, will be the next key reform for economic stability, leading to a sustainable economy in the long term, according to Central Bank Governor Dr. Nandalal Weerasinghe.
“The next reform to be implemented is to bring in a strong FMRA and fiscal rules. So, once the government announces the fiscal targets, the government cannot deviate from these targets. If a deviation takes place under special circumstances such as a pandemic, then you need to bring a corrective mechanism in the following year. It also has to be in the law,” Dr. Weerasinghe said.
He made these remarks at the inauguration of the CA Sri Lanka Annual Research Symposium, held in Colombo, yesterday.
The government has announced plans to introduce a new Public Financial Management (PFM) Act next year, incorporating binding fiscal rules and appointment of an Inspector General to keep the expenditures in check.
The FMRA was introduced to enact fiscal rules in the country, with a view to maintain fiscal discipline. However, successive governments failed to comply with the fiscal rules, in particular the budget deficit rule, which has never been complied with up-to-date.
Dr. Weerasinghe pointed at continuous large fiscal deficits as the root cause of the current economic crisis, in the absence of a proper framework. Despite the FMRA, he noted that the country has been running at over 8-9 percent fiscal deficits.
Dr. Weerasinghe partially blamed the weak FMRA for the current economic crisis, as it didn’t contain certain critical provisions such as corrective action, in order to rectify the shortfalls in fiscal targets in the following years.
He noted that developed countries such the United States and EU countries have been able to remain on the path of fiscal discipline due to strong fiscal rules.
“We have seen a lot of countries that have successfully maintained fiscal discipline have strong fiscal rules.”
Meanwhile, Dr. Weerasinghe remarked that the proposed New Monetary Law Act would relieve the Central Bank from any provisions requiring to fund excessive budget deficits through monetary expansion (money printing), which has led to high inflation and deprecation of the rupee.
He opined that these two reforms together would be most critical to maintain both fiscal and monetary stability.
“These are the two important reforms that will bring in proper frameworks, irrespective of any change of government and administration. However, the public support is crucial,” he added.