• Insulating conduct of monetary policy from fiscal and political pressures not sole responsibility of monetary watchdog
• Asserts CBSL’s independence needs to be supported by SL’s social and political culture
• Stresses need for CBSL to promote a culture of transparency, with new act explicitly recognising independence
• Points out three areas of act that need to be relooked

By Shabiya Ali Ahlam
The passage of the Central Bank of Sri Lanka Act is a significant milestone on the path to achieving good governance in the conduct of monetary policy but insulating the conduct of monetary policy from fiscal and political pressures, especially in the upcoming election year, would not be the responsibility of the monetary watchdog alone, asserted a top economist.
Presidential Advisor and former International Monetary Fund Director Dr. Sharmini Coorey stressed that everyone, including the political actors, need to create the culture of respecting the Central Bank of Sri Lanka’s (CBSL) operational independence and the integrity of its decision-making. 

“The Central Bank’s independence needs to be supported by our social and political culture,” she said.
Dr. Coorey shared her insights during the 73rd Anniversary Oration of the Central Bank of Sri Lanka, held in Colombo, this week. Her presentation focused on the theme ‘The Way Forward: Price Stability and Prosperity Require Good Governance’.
While the act explicitly recognises the CBSL’s independence, Dr. Coorey pointed out that the institution would also need to promote a culture of transparency. 
“Transparency is a ‘must have’—not simply a ‘nice to have’—in an inflation targeting regime. Clear explanations of how the Monetary Policy Board sees inflation risks and how its actions will keep future inflation within the target range are needed to anchor inflation expectations of financial markets and the public, so that actual inflation stays within the target range,” she said.
Dr. Coorey opined that transparent communication may initially be met with confusion and misinterpretation. But over time, both financial markets and the public would learn how the Monetary Policy Board assesses inflation risks and how it is likely to react to shocks. 
Further, as the CBSL law gets established and the CBSL’s practices evolve, she noted that a further strengthening of the legislation could be considered to safeguard its independence. 
According to Dr. Coorey, three features of the law could be re-examined in that context. First is the need to reconsider the description of the powers, duties and functions of the Central Bank. 

The second is to consider ring fencing, even more tightly the requirement imposed by the Supreme Court that the government should have access to direct Central Bank financing in emergency circumstances. 
The third and most important feature that needs to be relooked is the size of the Monetary Policy Board, which should be reduced to five or seven members and not include the members of the Governing Board.