Monday, September 25, 2017

Central Bank Law aims for independence

The long-awaited new Central Bank Law, signed by President Thein Sein on July 11 and published two days later in the Myanmar-language edition of The New Light of Myanmar, aims to establish the central bank as a body independent from the government.

Observers consider this to be an important step toward building investor confidence. Previously, the central bank was an entity under the finance ministry, effectively obliged to finance the government by lending money to it, or buying government securities from it, at concessionary conditions – in other words, by printing money.

This was a recipe for inflation. Business people are reluctant to invest in an inflationary environment as inflation decreases the value of the return on their investment.

The new law still allows the central bank to provide loans to the government, but only with parliamentary approval. The central bank may still purchase and sell government securities, however this is limited to transactions with “financial institutions and the public”. The government may no longer have access to “cheap money”.

Contrary to what observers expected, the new law contains no regulations on the formation of joint ventures between foreign and local banks.

According to the new law, the members of the board of directors of the central bank are to be appointed by the president and approved by parliament. Previously, the directors were appointed “by the government”.

The appointment automatically terminates any tenure as public officer or membership in parliament. Directors must not be members of political parties. They are effectively banned from having any other employment and from owning more than 5 percent of a company’s equity.

The old law also contained a clause barring lawmakers and public officers from serving on the board of directors of the central bank, but the government was authorised to grant “exemptions for special reasons”.

The board of directors is composed of the central bank’s governor, three deputy governors and “five external experts selected by the government”. The directors must be “well versed and experienced in any of the central bank’s operations, in economics, in finance and banking law, and in accounting and auditing”. It may be a problem in practice to find a sufficient number of qualified and willing candidates. Foreigners may not be appointed.

Representatives from the Ministry of Finance and the Ministry of National Planning and Economic Development may attend board meetings as observers.

An important aspect to the independence of any central bank is the security of tenure of its officers. If, for example, the governor, although nominally independent, can be replaced at will, he may be reluctant to fend off encroachments on the central bank’s areas of competence. The new law states that, apart from voluntary resignation, a director’s tenure may be terminated if an incompatibility arises (eg, the director acquires more than 5 percent of the equity of a company); if the director is sentenced to prison; if the director skips board meetings for more than three months; and if “the president decides that the director is incapable of discharging his duties”.

The law does not specify whether the termination of a director’s tenure requires parliamentary approval. In any case, the new Central Bank Law illustrates (again) the strong position of the president. It remains to be seen whether the president’s power to determine that a director is “incapable of discharging his duties” (and the right of officials of ministries to attend board meetings) will have any impact on the central bank’s independence. Ultimately, laws work best when their spirit as well as their letter is observed.

Sebastian Pawlita and Kyaw Zai Ya are consultants at Polastri Wint & Partners Legal & Tax Advisors in Yangon.