Does the Central Bank Bill violate the Constitution?

The Bill consists of 134 clauses…at least 21 clauses were held to be inconsistent with the Constitution. 73 clauses/sub-clauses should be amended

The Bill titled Central Bank of Sri Lanka was presented to the Parliament on March 7. Six citizens petitioned the Supreme Court claiming that the Bill violated the constitution and need to be passed by 2/3rd in Parliament and approved by people at a referendum to become law. 

The case was heard on the 23rd and 24th of March. Dr Nandalal Weerasinghe, the Governor of the Central Bank (CB) was present in person and heard by Supreme Court in terms of Article 134(3) of the constitution.   

The new law repeals the present Monetary Law Act and establishes an autonomous Central Bank (CB) with administrative and financial autonomy. The new law restricts third-party interference with the affairs of the CB. The autonomous CB determines and implements the Monetary Policy, Exchange Rate Policy and Macro-prudential policy measures (among others) in Sri Lanka.   

The Constitution does not permit any State institution to function outside the control of the Executive (Government) and the Legislature (Parliament). 

Presently, the direction and control of the government are vested with the cabinet of ministers (Article 43(1)) and the full control of public finance is with the parliament (Article 148). Petitioners argued new law violates both these aspects.   

Does the bill create an autonomous and independent institution which is not subject to Executive and Parliamentary control?

The Supreme Court considered clauses (Sections) 26 and 28 of the Bill in this regard. Clause 26 provides that “(l) The Minister and the Central Bank shall sign a monetary policy framework agreement with regard to setting out the inflation target to be achieved by the Central Bank.” The Supreme Court viewed that “Clause 26(1) of the Bill does not provide for a proper criterion to address a possible situation where a difference of opinion arises between the Minister and the Central Bank, the said Clause is arbitrary and capricious.”  

Dealing with Clause 28, which stipulates the duty of the Monetary Policy Board where it anticipates economic disturbances that are likely to threaten the domestic price stability or there are abnormal movements in the price level that are endangering such domestic price stability, the Supreme Court held,   

“[However], the said Clause is silent on the action/steps that should be taken by the Minister. The drafters of the Bill should have included such a procedure in the said Clause with the expectation that such situations warrant the intervention of the Government. In the circumstances, the omission to include a provision for the Government to intervene in such instances makes Clause 28 of the Bill arbitrary and capricious.”  

Supreme Court concludes;  
“The Constitution has conferred power on the executive to make decisions on the economic and monetary policy of the Government. As at present, the link between the Central Bank and the executive and thereby the formulation of the monetary policy is established through the presence of the Secretary to the Treasury being a member of the Monetary Board. However, the Bill has removed the participation of the Secretary in the decision-making process of the Central Bank. A careful consideration of the submissions made by the learned counsel for the petitioners, intervenient-petitioners, and the learned Additional Solicitor General shows that the Bill does not contain sufficient provisions to have executive control over the Central Bank. Thus, the Bill is inconsistent with Articles 3 and 4(b)) of the Constitution, and thereby should be passed in Parliament by a special majority as required by Article 84(2) and approved by the People at a Referendum in terms of Article 83 of the Constitution.”  

Autonomy and Accountability
The Petitioners complained that while distancing the CB from the Government and Parliamentary control, the new Bill provides no room for accountability of the CB for its actions and inactions. 
Clause 80, which deals with the subject of accountability, was totally “dead” and ineffective.  
Addressing “autonomy” stated in clause 5 of the Bill Supreme Court gave mind to the following sub-clause;  
“5 (2). The Central Bank shall be autonomous and accountable as provided for in this Act”  

The Supreme Court held;   

“Autonomy entails operational freedom in carrying out its functions, whereas accountability requires the Central Bank to act in a transparent manner and to be accountable for their actions and inactions. Thus, the Central Bank shall not only be accountable to the Executive and the Parliament but also to the People of the country.  
Further, the words “as provided for in this Act” in Clause 5(2) of the Bill restrict the accountability of the Central Bank only to the matters specified in the Bill. Thus, the said phrase effectively excludes the accountability of the Central Bank under the common law and other laws of the country. Thus, Clause 5(2) is arbitrary, capricious, and therefore inconsistent with Article 12(1) of the Constitution.”  

The Supreme Court appreciated the proposition of the Additional Solicitor General to amend Clause 80 at the Committee stage of the Parliament by deleting Clauses 80(2) and 80(3) in the present Bill and replace by the following clauses;  

“(2) (a) The Governor of the Central Bank, the members of the Governing Board and the Monetary Policy Board and every Deputy Governor of the Central Bank shall, at the request of Parliament, be heard by Parliament or any of its committees once in every four months, regarding the functions of the Central Bank.  

(b) The Governor of the Central Bank, the members of the Governing Board and the Monetary Policy Board and every Deputy Governor of the Central Bank may, on their own initiative, seek an opportunity to apprise of the functions of the Central Bank or to submit any document or report of the Central Bank to Parliament.”:  

(3) The Governor of the Central Bank shall ensure that the Central Bank shall, within a period of four months after the close of each financial year, publish, and lay before the Parliament through the Minister, a report approved by the Governing Board, on the state of the economy during such financial year emphasizing its policy objectives and the condition of the financial system. The report shall include a review and an assessment of the policies of the Central Bank followed during such financial year.”  

ln order to enhance accountability on the part of the Central Bank, the Governor of the Central Bank, the members of the Governing Board and the Monetary Policy Board, and every Deputy Governor of the Central Bank, and to increase Parliamentary control over the affairs of the Central Bank, the Supreme Court has suggested the Parliament to insert the following provision to Clause 80 of the Bill;  

(a) to make it mandatory for the Governor of the Central Bank, the members of the Governing Board and the Monetary Policy Board of the Central Bank, and the Deputy Governors to be present in Parliament after one month from the release of the quarterly reports of the Central Bank.   

“A similar provision can be found in other jurisdictions. For example, the Federal Reserve Act of 1913”, the Supreme Court held.  

Currency other than Sri Lankan Rupee
Clause 47 deals with CB powers regarding issues and currency and its usage. Clause 47(2) reads that   
(2) Any transaction executed or liquidated between or among residents in Sri Lanka shall, unless otherwise authorized by the Central Bank, be in Sri Lanka Rupees.”  

The Supreme Court held;  
“Clause 47(2) of the Bill confers power on the Central Bank to allow the residents of Sri Lanka to use currencies other than the Sri Lanka rupee for any transaction executed between residents. It is pertinent to note that the Foreign Exchange Act No. 12 of 2017 stipulates the criteria for such authorization of transactions. However, the Bill does not repeal the provisions in the Foreign Exchange Act relevant to the above, and thus, Clause 47(2) of the Bill will lead to confusion and ambiguity. Further, though the Foreign Exchange Act sets out a procedure for such authorization of using foreign currency in Sri Lanka, Clause 47(2) of the Bill does not stipulate a procedure/criterion that should be followed by the Central Bank in authorizing the use of currencies in Sri Lanka other than the Sri Lanka rupee. Thus, the said Clause 47 (2) of the Bill is vague and therefore, inconsistent with Article 12(1) of the Constitution. Hence clause 47(2) should be passed in Parliament by a special majority stipulated in Article 84(2) of the Constitution. However, the said inconsistency will cease if a Committee Stage amendment is made by conferring power on the Central Bank to take steps in terms of the Foreign Exchange Act No. 12 of 2017.”  

Governors holding positions outside the CB
Proviso to clause 14(6) permits the Governor to accept and hold various positions outside the CB. These include academic positions in research institutions, Commissions of Inquiry, investigation councils, committees etc. The Supreme Court’s view was that this may lead to conflicting interests and this clause should be removed;  

“Although Clause 14(6) of the Bill states that the Governor of the Central Bank shall not accept or hold any other office or employment whatsoever, whether public or private, and whether remunerated or not, the proviso to Clause 14(6) of the Bill enables the Governor of the Central Bank to accept and hold other positions. Taking into consideration the duties and functions that are required to be performed by the Governor of the Central Bank, such a proviso is unwarranted, arbitrary, and capricious, and thereby violates Article 12(1) of the Constitution. Therefore, Clause 14(6) shall be passed in Parliament by a special majority required under the provisions of Article 84(2) of the Constitution. However, the said inconsistency in Clause 14(6) will cease if the proviso to the said Clause is deleted.”  

Central Bank Assistance to the Government
Clause 86 states that the CB shall not directly or indirectly grant credits to the Government or public authority owned by the Government and the CB should not incur any cost on behalf of the Government. The Supreme Court decided that the total restriction of CB assisting the Government contravenes the Constitution. Supreme Court held;  

 “However, the Central Bank has the overarching duty to ensure liquidity in the market. Therefore, even though the bank is prohibited from directly granting credit to the Government, by entrusting liquidity, the Central Bank will provide avenues for the Government to raise the necessary money through the banking system.   

Further, the above does not capture a situation where assistance is needed to cope with a national crisis, e.g., liquidity issues that arose during the COVID-19 pandemic or Easter Sunday attacks  
Further, there can be a situation in which the banks in the country may face liquidity issues due to reasons beyond the control of the Central Bank and the Government. Though there is a provision for the Central Bank to assist financial institutions there is a prohibition for monetary financing of the Government in similar circumstances. Thus, the total prohibition on the Central Bank assisting the Government to maintain liquidity in the market violates the equal protection of the law enshrined in Article 12(1) of the Constitution. Therefore, it should be passed by a special majority in Parliament as required by Article 84(2) of the Constitution.  

However, the said inconsistency will cease if the said Clause is amended by requiring the Central Bank to assist the Government in exceptional circumstances where liquidity issues have arisen due to unforeseen circumstances. However, such assistance shall be provided by the Central Bank only for a limited period and the Government shall take immediate measures to remedy the situation in consultation with the Central Bank.”  

Other inconsistencies 
The Bill consists of 134 clauses.   
At least 21 clauses [3, 5, 13(10), 14(6), 15(9), 17(2)(m), 19, 20, 23(1), 24(2), 26(1), 28, 47(2), 59 (6), 73, 86, 103(5), 106, 107 (3), 111(2),120] were held to be inconsistent with the constitution. About 73 clauses/sub-clauses should be amended.   

The Bill could be passed by a simple majority only if such amendments were done to bring it consistent with the Constitution.   

Had six citizens not petitioned the Supreme Court, the Bill would have been passed with all such violations creating a monstrous Central Bank.  
-The writer is an Attorney-at-Law