The Liability Management Law tabled in Sri Lankan parliament last week will help the country to institutionalize fiscal consolidation and address budget deficit which has been the island’s main source of instability.
Addressing the inauguration of the 12th Annual Inspection Workshop of the International Forum of Independent Audit Regulators (IFIAR) held in Colombo last week, Central Bank Governor Dr. Indrajit Coomaraswamy acknowledged it is encouraging the government to institutionalize fiscal consolidation by giving teeth to the Fiscal Responsibility Management Act.
“The FRMA currently has some targets although they are not binding. What we are trying to do is to get the government to amend and strengthen the law and make these targets binding except in specific cases which would be set out in the law where they would be able to go outside the targets,” the Governor explained.
He noted that the Act will help Sri Lanka to improve public debt management, enabling the government to raise more money than what is needed to finance the budget deficit to help fund debt repayments.
“There is a concerted effort being made to strengthen the macroeconomic fundamentals.
We are doing that by putting in place clear frameworks for both policy making and institutionalizing these frameworks. The most important is the trajectory of fiscal consolidation that the government has embarked upon through revenue enhancement measures,” Coomaraswamy emphasised.
He noted that the amendments made to the existing law allows for provisions for instances where the country needs to respond to adverse events such as a natural disaster or a severe recession through a stronger counter fiscal policy.
“So there will be specific reasons why we could deviate from the target and even when you do that you should show how you are going to come back to be within the target. That’s what we are trying to do,” he explained. Presenting the 2018 Roadmap, Dr. Coomaraswamy had earlier descrived the Liability Management Act as a prudent strategy allowing the government to manage public debt in a more flexible manner.
“Under this framework, the public debt manager would create a buffer fund to minimise the rollover risk of debt stock eliminating the necessity for the Central Bank to provide financial assistance to the government at the beginning of each year as per the current provisions of the MLA.
“Even more importantly, it will create the space to go beyond the government’s borrowing requirement in any given year to mobilise financing to address the current bunching of external debt payments from 2019. The government’s decision to earmark the proceeds of divestitures for liability management is also a very favourable development in this regard,” he pointed out.
Member of Parliament, Bandula Gunawardena last week said that the Joint Opposition would file legal action in the Supreme Court challenging the Active Liability Management Bill, which was presented to Parliament on Monday.
Gunawardana alleged that the Bill violated the Constitution as it permits the Prime Minister, who is in charge of the Central Bank (CB), to obtain a foreign or a domestic loan not exceeding 10 per cent of the unsettled loans of the previous fiscal year.