Tuesday, 04 August 2020 08:39

CB’s claim of discretion on withdraw funds from US Fed Reserve creates confusion

Central Bank’s claim of having discretion power to withdraw US $ 1 billion from the US Federal Reserve under its Repo facility pledging a sum of $ 1 billion worth of US Treasury Bonds was against the provisions of the country’s monetary law, several eminent economists and leading opposition politicians said.

The facility is an overnight repurchase (Repo) facility available for ‘Foreign and International Monetary Authorities’ (FIMA), as a temporary source of dollar liquidity to be used when required by the Central Bank..

Issuing media release CBS stated that when this Repo facility is settled by the bank , there will be no change in the bank’s reserve position as the FED would release the pledged bonds back to the CBSL.

The cost to the CBSL would be the applicable repo fee, which is about 0.35% per annum, media release highlighted.

However, several eminent economists noted that The Federal Reserve holds the foreign currency in an account at the foreign central bank and the dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York.

At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate, they said indicated the relevant clarification of the Fed Reserve. .

The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve.

The CBSL has entered into this agreement with the FED, but no borrowings have yet been made. Withdrawing from the facility at any point is at the discretion of the CBSL, the bank stated in the media release.

Central Bank Senior Deputy Governor Dr. Nandalal Weerasinghe during a recent press conference said that the funds would only be drawn as a “last resort”.

According to Monetary Law , the Minister of Finance has been empowered to give direction to the Monetary Board to implement the Government policy, economic experts said.

Any decision to pledge state assets should be taken by the cabinet and it should be carried out with the parliamentary approval, they pointed out.

Former State Minister of Defense and UNP Ruwan Wijewardena said that that as Parliament is vested with the control of public finance it was necessary that the Government’s plans be presented to the House along with proposals on how to repay the Repo facility before a final decision is made.

He alleged that the Central Bank has taken action beyond its mandate as Parliament is vested with the control of public finances, and the monetary law does not make specific provisions for this repurchase agreement.


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