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Monday June 24th, 2024

Sri Lanka top court finds multiple clauses in draft monetary law “capricious and arbitrary”

ECONOMYNEXT – Sri Lanka’s Supreme Court has found several clauses in a planned controversial draft monetary law to be ‘capricious and arbitrary’ and against the country’s constitution.

The supreme court has suggested remedies to resolve legal conflicts with the constitution as well as some other laws in the country, including a foreign exchange act.

The law is to be passed as part of an International Monetary Fund’s latest program.

Critics however have warned that the new law does not solve the fundamental problems of anchor conflicts and monetary instability which have plagued the country for over 7 decades and drives central bank into IMF programs.

The new monetary law seeks to institutionalize dual anchor conflicts (operating both monetary and exchange rate policy simultaneously) and to legitimize output gap targeting (printing money or monetary stimulus to boost growth), that have triggered currency crises and defaults in Sri Lanka and other countries which have reserve collecting central banks, critics have warned.

After the bill is passed into law, the central bank is expected to seek authority to print money and generate inflation, perhaps up to 5 percent, as it had done during several years past.

The Supreme Court found multiple clauses against the constitution. One related to the inflation target itself.

According to Section 26 of the proposed bill ” 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.”

ft) If the Central Bank fails to meet the inflation target by a margin determined in lerms of subsections (l) and (3) of this section for two consecutive quarters, the Monetary Policy Board shall submit a report to the Parliament through the Minister, which shall also be made available to the public, setting out-
(a) the reasons for the failure to achieve the inflation target,’
(b) the remedial actions proposed to be taken by the Central Bank; and
(c) an estimate of the time-period within which the in/lation target shall be achieved

Thus, as 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

It was suggested that “In the even the Minister and the Central Bank are unable to reach an agreement with regard to the inflation target as referred to in subsection (l), the Minister shall place his proposal for the inflation target and that of the Central Bank before the Cabinet of Ministers and the Cabinet of Ministers shall determine the inflation target to be achieved by the Central Bank.”

Clause 28 of the Bill sets out the criteria that should be followed by the Monetary Policy Board if it anticipates an economic disturbance that is likely to threaten the domestic price stability in Sri Lanka or if there are abnormal movements in the price levels that are actually endangering such
domestic price stability. Further, the said Clause places a duty on the Monetary Policy Board to inform the Minister if it anticipates any of the situations set out in Clause 28(1) of the Bill.
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.

Court also round that Clause 14(16) of the Bill enables the Govemor of the Central Bank to accept and hold other positions. Taking into consideration the duties and functions that are required to be pertbrmed by the Governor of the Central tsank. such a proviso is unwarranted. arbitrary, and capricious, and thereby violates Article 12(1) of the Constitution

The court also suggested deleting a provision where Deputy Governors could be appointed from the outside without any qualifications.

Court has also suggested provisions allowing the President to suspend the Governor pending inquiry.

Central bank employees are to be prohibited from working in a financial institution for three years.

As a large number of financial institutions are coming under the Central Bank, such persons may come across confidential and sensitive information during their tenure at the Central Bank. Further, such a restriction is essential to maintaining the impartiality and integrity of the persons working at the Central Bank” Hence, the absence of such a provision is arbitrary and capricious.

Furthermore, there is no rationale for imposing such a restriction only on the appointed members.

Thus, it is imperative to have a Clause that restricts the Govemor of the Central Bank, Deputy Governors, and employees of the Bank from serving in any capacity for any financial institution until the expiration of a period of three years from the date of such cessation.

The bill had proposed only that appointed members to the monetary board be prohibited from working in a financial institution for one year.

Downloa the Supreme Court determination from this link.

Comments (3)

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  1. Nihal Rodrigo says:

    Under the existing provisions in the MLA (section 64), the CBSL can recommend fiscal and other measures for adoption by the government. There could be a good rationale for omitting some parts by the technical advisers

  2. sacre blieu says:

    They should seriously look into the legitimacy of the government as a defeated candidate has formed the new regime which is illicit and continues to issue illegal orders and edicts.

  3. sacre blieu says:

    And imagine our country with over sixty DIG’s to supervise and administer the law in a country that has gone lawlessness to the core.

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Comments (3)

Cancel reply

Your email address will not be published. Required fields are marked *

  1. Nihal Rodrigo says:

    Under the existing provisions in the MLA (section 64), the CBSL can recommend fiscal and other measures for adoption by the government. There could be a good rationale for omitting some parts by the technical advisers

  2. sacre blieu says:

    They should seriously look into the legitimacy of the government as a defeated candidate has formed the new regime which is illicit and continues to issue illegal orders and edicts.

  3. sacre blieu says:

    And imagine our country with over sixty DIG’s to supervise and administer the law in a country that has gone lawlessness to the core.

Sri Lanka central bank appoints two Deputy Governors

ECONOMYNEXT – Sri Lanka’s central bank said Assistant Governors A A M Thassim and J P R Karunaratne were promoted to the post of Deputy Governor.

The full statement is reproduced below:

APPOINTMENT OF NEW DEPUTY GOVERNORS OF THE CENTRAL BANK OF SRI LANKA

In terms of the provisions in the Central Bank of Sri Lanka Act, No. 16 of 2023, Hon. Minister of Finance, as recommended by the Governing Board, has appointed Mr. A A M Thassim, Assistant Governor and Secretary to the Governing Board, and Mr. J P R Karunaratne, Assistant Governor, as Deputy Governors of the Central Bank of Sri Lanka with effect from 20.06.2024 and 24.06.2024, respectively.

Mr. A A M Thassim

Mr. A.A.M. Thassim has over 31 years of service at Central Bank of Sri Lanka (CBSL) in different capacities in the areas of Supervision and Regulation of Banking Institutions, International Operations, Communication, Payments and Settlements, Employees Provident Fund, Finance, Risk Management, Deposit Insurance, Security Services and Information Technology.

He has served as the Director of Bank Supervision (DBS), Director of International Operation (DIO) and Director of Communications (DCM) and has contributed towards strengthening the legal framework, governance, implementation the Basel 3 international guidelines for capital and liquidity and adoption of International Financial Reporting Standards (IFRS) 9 to the banking sector, thereby strengthening the resilience of the Financial Sector.

Further, as the DIO, Mr. Thassim was responsible for the investments and management of foreign reserves of the country and exchange rate management. Mr. Thassim has also gained experience and knowledge in the field of payment systems and was involved in the implementation of the Cheque Imaging and Truncation System. In addition, he has also served on several high-level internal committees including in the areas of monetary policy, financial system stability and international reserves.

Prior to the appointment as the Deputy Governor, Mr. Thassim held the position of Assistant Governor and was in charge of several key departments including the Bank Supervision Department. He also served as the Secretary to the Governing Board, Monetary Policy Board, Audit Committee, Board Risk Oversight Committee, Ethics Committee and Financial Sector Crisis Management Committee.

At present, Mr. Thassim is a board member of the Sri Lanka Export Credit Insurance Corporation and the Vice Chairman of the Institute of Bankers of Sri Lanka (IBSL). Further, he has also served as a board member of the Credit Information Bureau of Sri Lanka and LankaClear (Pvt) Ltd.,

Mr. Thassim is an Associate member of the Chartered Institute of Management Accountants (ACMA) United Kingdom and possesses a Masters in Business Administration (MBA) from the Postgraduate Institute of Management (PIM), University of Sri Jayewardenepura (USJ). He has also completed a programme on Gold Reserves Management from Hass School of Business, University of California, Berkeley, USA.

He is also an Alumni of Harvard University, USA having successfully completed the executive programme on Leaders in Development conducted by the John F. Kennedy School of Government.

Mr. J P R Karunaratne

Mr. J P R Karunaratne has over 33 years of service at the Central Bank of Sri Lanka in different capacities in the areas of supervision and regulation of Banks and Non-Bank financial institutions, Currency management, public debt, Secretariat, Finance, policy review and monitoring. He has served as the Director of Supervision of Non-Bank Financial Institutions (DSNBFI) and the Superintendent of Currency (SC) and has contributed towards strengthening the legal and regulatory framework in the Non-Bank Financial Institutions sector and has played a prominent role in the consolidation of the Non-Bank Financial Institutions sector. Prior to the appointment as a Deputy Governor, Mr. J P R Karunaratne held the position of Assistant Governor and was in-charge of the Department of Supervision of Non-Bank Financial Institutions, Finance Department and the Facilities Management Department.

As an Assistant Governor Mr. Karunaratne has previously overseen several other departments namely, Macroprudential Surveillance, Resolution and Enforcement, Foreign Exchange, Currency, Regional Development, Legal and Compliance, Risk Management, Center for Banking Studies, Security Services and Staff Services Management.

He has also served as the Secretary to the Monetary Board, Secretary to the Board Risk Oversight Committee, Monetary Board Advisory Audit Committee and the Ethics Committee. Further, He was on release to the Ministry of Defence, where he served as a Financial Advisor. He was also appointed as the Chief Operating Officer for the Secretariat of Committee of Chartered Accountants appointed by the Supreme Court in 2009.

He has served as the Chairman of the Sri Lanka Accounting and Auditing Standards Monitoring Board and has been a Council Member of the Certified Management Accountants (CMA) of Sri Lanka. Mr. Karunaratne was awarded the CMA Sri Lanka Business Excellence Award at the CMA Sri Lanka National Management Accounting Conference 2023 in recognition of his service to the profession. He has also received “Long Service Award” of the IBSL in 2019 in recognition of his long career and contribution as a resource person at IBSL.

He was the Project Team Leader of the South East Asian Central Banks (SEACEN) Malaysia, research project on “Implementation of Basel III Challenges and Opportunities in SEACEN Countries” and SEACEN published the research in 2013. He serves as a member of several internal and external committees at present.

Mr. Karunaratne holds a Master of Commerce Degree in Finance from the University of New South Wales, Australia and a Postgraduate Diploma in Applied Statistics and a Bachelor of Science (Physical Science) Degree with a First class from the University of Colombo. He is a Fellow Member of the Chartered Institute of Management Accountants (CIMA), UK and a Chartered Global Management Accountant (CGMA). Further, he is an Associate Member of the CMA Sri Lanka.

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Sri Lanka opposition questions claims that IMF housing tax is only for kulaks

ECONOMYNEXT – Sri Lanka’s opposition has questioned claims made by government spokesmen that a tax on housing proposed in an International Monetary Fund deal is only limited to rich people but if as promised by President one house is exempt, it is welcome, legislator Harsha de Silva said.

Sri Lanka President Ranil Wickremesinghe made a promise in parliament that the first house of a citizen will be excluded from the property tax.

Related Sri Lanka to exempt one house from imputed rent wealth tax: President

But opposition legislator Harsha de Silva pointed out that the IMF program documents clearly says taxes will be levied on owner occupied houses on ‘imputed taxes’, not second houses.

Under current inland revenue laws, actual rent income from a second house is already captured as part of taxable income.

The IMF document mentions a threshold value from which taxes will be exempt but not that a whole owner-occupied primary residence will be exempt.

“The tax is imposed on the income of individuals (rather than real property itself) and thus raises central government revenue in accordance with the constitution,” IMF staff said in their report.

“A similar tax was previously included in the Inland Revenue Act. No. 10 of 2006.

“Under this regime, primary residences were exempt and the assessed values for rating purposes were used to determine the base.

“Given the broad exemption and the use of outdated and downward biased annual values, the tax generated hardly any revenue.”

Meanwhile Sri Lanka has promised to impose the housing tax from April 01, 2025.

“…[W]e will introduce an imputed rental income tax on owner-occupied and vacant residential properties before the beginning of the tax year on April 1st, 2025,” the memorandum of economic policies agreed with the IMF said.

“An exemption threshold and a graduated tax rate schedule would make this tax highly progressive.

“The full revenue yield from this tax is estimated at 0.4 percent and would materialize in 2026 (with a partial yield of 0.15 percent in 2025).

“This yield would still fall short by 1 percent of GDP relative to the expected yield of 1.2 percent of GDP from the property tax envisaged for 2025 onwards.”

Presidential Undertaking

“Whatever the President said the IMF agreement says owner occupied house,” De Silva told in parliament.

“It is not the second house that is mentioned in the agreement.

“But there is one thing. I am happy as Samagi Jana Balawegaya, that we have been able to save the middle class in society from a massive tax that was to be imposed.”

In Sri Lanka there is a belief that the most productive citizens are fair game for excessive or expropriationary taxation, just like kulaks were targeted in the Soviet Union for actual expropriation, critics say.

Wealth taxes have had disastrous effects on some US cities like Baltimore, leading to falling populations and dilapidated houses.

Sri Lanka is currently facing a brain drain due to high income tax after on top of depreciation from severe monetary debasement from a flexible exchange rate, which is neither a hard peg nor a clean float.

Sri Lanka has imposed a wide range of taxes on the people to maintain a bloated state, after inflationists engaged in extreme macro-economic policy (tax and rate cuts) glorified in Saltwater-Cambridge doctrine to boost growth, throwing classical economic principles and monetary stability to the winds and driving the country into external default.

The IMF itself gave technical assistance the central bank to calculate potential output inviting the agency to cut rates to close the perceived econometric ‘output gap’.

In the run up to the default, rate cuts triggered multiple external crises, leading to output shocks as stabilization programs were implemented.

Macro-economic Policy

Macro-economic policy as known now was devised by Cambridge academic J M Keynes in the wake of the Great Depression triggered by the Federal Reserve after it invented open market operations and policy rates in the 1920s and also popularized by Harvard academic Alvin Hansen among others.

Macro-economic policy started to de-stabilize countries in peacetime in the interwar years and after World War II it led to the collapse of the Bretton Woods system.

The Great Depression was also a peacetime collapse of what was later known as the roaring 20s’ monetary bubble.

“They have blithely ignored the warnings of economists,” classical economist Ludwig von Mises wrote of European nations which got into trouble from rate cuts and Keynesian stimulus, which brought currency depreciation and protectionism in its wake from the 1930s.

“They have erected trade barriers, they have fostered credit expansion and an easy money policy, they have taken recourse to price control, to minimum wage rates, and to subsidies.

“They have transformed taxation into confiscation and expropriation; they have proclaimed heedless spending as the best method to increase wealth and welfare.

“But when the inevitable consequences of such policies, long before predicted by the economists, became more and more obvious, public opinion did not place the blame on these cherished policies…”

Who….?

In Sri Lanka however there is some understanding of the role played by macro-economists in the most recent crisis.

There are rumblings of unhappiness about ‘central bank independence’ given to an agency to create 5 to 7 percent inflation and currency debasement under a flexible exchange rate and its constitutional status relating to parliamentary control of public finances.

Sri Lanka’s central bank’s current flexible inflation targeting (inflation targeting without a floating rate) regime as well as its 1980s money supply targeting without floating rate has busted the national currency for decades and made it impossible to run budgets, made it difficult for people build houses which are now to be taxed, and also for millions to live and work in the country of their birth.

Fiscal metrics deteriorate each time rate cuts drive the country into currency crises and new taxes are brought in stabilization programs, ousting reformist governments and leading to policy reversals.

Sri Lanka’s citizens have suffered for decades from the privilege given to a few macroeconomists to print money to cut rates with inflationary open market operations and trigger forex shortages.

Related How Sri Lanka’s elections are decided by macro-economists and the IMF: Bellwether

Critics have pointed out that since 1954 in particular, central bank rates cuts which drive the country into external crises and the stabilization programs that follow, have been the main determinant of elections in the country and election of fringe political parties. (Colombo/June13/2024)

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India supports Sri Lanka Coast Guard to boost maritime security

ECONOMYNEXT – India has given 1.2 million US dollars’ worth spare parts to Sri Lanka’s Coast Guard to be used in a vessel also gifted to the Indian Ocean Island on an earlier occasion, the Indian High Commission in Colombo said.

“Handing over of the large consignment of spares symbolizes India’s commitment to support capability building towards addressing the shared challenges of Maritime Security in the region,” the Indian High Commission said

The spare parts were brought to Sri Lanka on the Indian Coast Guard Ship Sachet, an offshore patrol vessel that was on a two-day visit to the island.

The spares were formally handed over to the Sri Lanka Coast Guard Ship Suraksha which was gifted to Sri Lanka in October 2017 by India.

India has gifted spare parts for the ship in June 2021 and April 2022 and also provided assistance in refilling of Halon cylinders in January 2024. (Colombo/June23/2024)

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