performing loan*Leads to macroeconomic stability as experienced in 2011/12
Opposition MP and UNP Economic Spokesman Dr. Harsha De Silva told parliament yesterday (19) that the Central Bank and Treasury were in breach of Section 89 of the Monetary Law Act of 1949 with large sums of money loaned to the state not returned to the monetary authority within six months as stipulated by this law, echoing that age old warning that unbridled money printing puts the entire economy at risk.
The Treasury is allowed to borrow up to 10 percent of its budgeted revenue for a given year from the Central Bank, but according to the law, these temporary borrowings must be settled within six months. Dr. De Silva charged that this piece of law was being flouted by the authorities.
In 2010, the government borrowed Rs. 78 billion through this temporary window which was not settled. In 2011, borrowings amounting to Rs. 95 billion were not settled. "It is clear the law is being flouted here. It is no longer a temporary loan but indefinite loan, not only that, it is also the largest non-performing loan in the country," Dr. De Silva charged in parliament.
He pointed out that the Central Bank was engaging in accommodative monetary policy which put pressure on inflation and interest rates. And when inflation is kept artificially low credit expansion fuels import growth leading to balance of payments problems which was experienced towards the latter half of 2011 with credit growth topping 35 percent.
"The corrective measures saw interest rates shoot up and the rupee fall and economic growth has fallen as a result. Fuel and electricity prices would be increased too. Some government ministers are now accusing certain Treasury officials of being economic hit-men. But, I say, both the Treasury and Central Bank must be held responsible for this predicament," Dr. De Silva said.
"Section 89 of the Monetary Law Act was formulated so that there would be limits and controls on government borrowings from the Central Bank in order to ensure price stability and overall macroeconomic stability. But now we have a situation where the government is borrowing to spend on unnecessary projects and sustain white elephants, while the Central Bank is printing monetary to finance this spending," Dr. De Silva pointed out.
"We must be careful. We must have financial discipline. Enforce Section 89 of the Monetary Law Act and ensure the Central Bank does not accommodate the Treasury’s wasteful spending. Unless this is done people will suffer," he said.
Economists have always highlighted the contradictory rules played by the Central Bank as bankers to the government while also being the guardian of price stability in the country.