The Central Bank as the banker to the Government maintains accounts of the General Treasury and Government institutions and agencies. The Treasury Account, known as DST Account, is the main transaction account to handle public debt flows. In terms of the MLA, Government or Government institutions and agencies must obtain the advice of the Monetary Board on the implications if any borrowing on the monetary conditions before raising such debts. This is to ensure that Government borrowing is made with the concurrence of the Monetary Board in line with the monetary policy. Two other important agency functions are the management of Employees’ Provident Fund and administration of Exchange Control Act, both of which have evolved controversy. In the case of Employees’ Provident Fund, the Monetary Board is empowered to manage the fund including investment of surplus funds in securities the Monetary Board considers fit. I know you have heard enough on some of the EPF investments made in the recent past. Given the nature of the EPF and responsibilities of the Government, EPF funds are, I would submit meant only for safer investments. BIS central bankers’ speeches  5  The Exchange Control Act is to regulate and manage foreign exchange flows of the country which is essentially a part of macroeconomic management. In economics, exchange controls are about the regulation of the quantity or volume in the foreign exchange market. Conversely, the Central Bank regulates the price or exchange rate in the market under the MLA.
There were, of course, “cold turkey” alternatives, but they were considered too risky at the time. The Central Bank of Iceland’s effective policy rate peaked at 18% in early 2009 (at the time, the seven-day collateral lending rate) but has now been reduced to around 5½% (now the average of the rates on certificates of deposit and current accounts). The exchange rate stabilised in the second half of 2009 with no supporting intervention since early November 2009. So far this year, the exchange rate has appreciated by 11% in trade-weighted terms, again without any supporting intervention. This has alleviated pressures on impaired private sector balance sheets and contributed to relatively speedy disinflation. Fiscal policy was set within a medium-term fiscal consolidation programme covering the period 2009–2013. The programme aims at a primary surplus in 2011 and a substantial overall surplus in 2013, making it possible to reduce Treasury debt from that year onwards. The announcement of a medium-term plan made it possible for automatic fiscal stabilisers to work more or less unhindered in 2009, with fiscal consolidation taking hold in 2010. This was important in two respects. First, it limited the negative demand effects of fiscal consolidation precisely when the recession was at its steepest. Second, it sent a signal that adverse public sector debt dynamics would be addressed over the medium term, thus reducing risk premia in domestic and foreign interest rates facing the sovereign.