The Monetary Law Act and The Central Bank Act Sri Lanka

The Central Bank Act No. 16 of 2023

Central Bank of Sri Lanka Act, No. 16 of 2023 provides the legal framework for the Central Bank of Sri Lanka (CBSL), replacing the previous Monetary Law Act (Chapter 422). The new act establishes the CBSL as a body corporate with administrative and financial autonomy and its main office in Colombo. Its capital is held solely by the government and cannot be reduced.

Key Objectives and Functions

The primary objective of the CBSL is to achieve and maintain

domestic price stability, while a secondary objective is to ensure the stability of the financial system.

To accomplish these goals, the CBSL’s powers and functions include:

• Determining and implementing monetary and exchange rate policies.
• Managing Sri Lanka’s official international reserves.
• Issuing and managing Sri Lanka’s currency, which is the Sri Lanka rupee.
• Regulating, supervising, and licensing financial institutions and payment systems.
• Acting as the financial advisor, banker, and fiscal agent to the government.
• Promoting financial inclusion and establishing deposit insurance and liquidity support schemes.

Governance Structure

The Act introduces a new governance structure with two main boards:

• Governing Board: This board is responsible for the overall administration, management, and general policy of the CBSL, except for monetary policy. It is chaired by the Governor and includes six members with expertise in fields like economics, banking, and law. The board is also tasked with approving the CBSL’s budget, annual accounts, and corporate strategy.
• Monetary Policy Board: Chaired by the Governor, this board is specifically charged with formulating monetary policy and implementing a flexible exchange rate regime to maintain price stability. The board includes members of the Governing Board, two external experts in economics or finance, and two Deputy Governors.

Key Provisions and Regulations

• Prohibition of Monetary Financing: The CBSL is prohibited from directly or indirectly granting credit to the government or purchasing government securities in the primary market. However, there are temporary exceptions for national emergencies or health crises, subject to parliamentary approval.
• Accountability: The CBSL is required to inform Parliament and the public about its policies and operations. The Governor and board members must appear before Parliament or its committees every four months to discuss the CBSL’s functions.
• Appointment and Term Limits: The Governor and other appointed members are nominated by the Minister and appointed by the President with the approval of the Constitutional Council. The term of office for the Governor and appointed members is six years, with a maximum aggregate term of twelve years.
• Financial Provisions: The CBSL’s financial reporting must align with internationally recognized accounting standards. If its assets fall below its monetary liabilities and paid-up capital, the CBSL can request a capital contribution from the government to remedy the deficit.
• Confidentiality and Immunity: Employees and board members are required to keep non-public information confidential. The Act also provides immunity from civil or criminal proceedings for acts done in good faith while performing their duties.
• Transitional Provisions: The Act repeals the Monetary Law Act but allows the continuity of the terms of office for the current Governor and Monetary Board members. It also addresses the treatment of outstanding government credit and securities under the old act.