Central banks are also state institutions, but with greater functional independence provided for in the respective statutes due to its specific nature of operations involving printing of money and conducting monetary policies. The simple reason for the central bank independence is that a Government cannot have one hand to spend through the fiscal policy and other hand to print money to finance expenditure through the monetary policy. Therefore, the clear separation between the Treasury and Central Bank is necessary, otherwise, economies and monetary systems will collapse sooner or later. Therefore, the Central Bank independence and the close co-operation between the Central Bank and the Treasury are highly recognized. I wish to quote from the Exter Report on this matter as the best piece of literature. I quote “….There are, however, many important problems of monetary policy, especially those relating to fiscal policy, on which a central bank must necessarily work in close harmony with the government. On such problems, experience in many countries has shown that a central bank with a degree of independence of the government proper can make economic analyses and hold views which are more detached and objective than those of a government department. Many governments have learned to value and to use the sort of independent and objective advice on monetary and other aspects of economic policy which central banks have been able to give.
As the Manager of Public Debt, the Central Bank raises local and foreign debt to meet expenditures approved through the Consolidated Fund, maintains such loan records and service such loans out of funds at Government Account with the Central Bank. The popular criticism here is the monetization of the budget deficit through Central Bank funds. The Central Bank’s purchase of Treasury bills is the cause of this criticism. The Central Bank purchases Treasury bills in order to use them for regulation of the domestic market liquidity (Open Market Operations) as permitted in the MLA and not for lending to Government. Further, under the MLA, the Central Bank is authorized to provide provisional advances to the Government up to 10% of the estimated Government revenue of the current financial year, subject to recovery of each advance within 6 months, and such advances are only to meet the expenditures authorized under the Consolidated Fund. Managing public debt by the Central Bank is beneficial for the country since the Central Bank can raise public debt in line with interest rate structure envisaged in its monetary policy. If the debt management is undertaken by a separate Government office, it may attempt to raise debts without regard to market interest rates and monetary policy and that will cause immense conflicts with the current monetary policy. The opposite view is that as the Central Bank manages public debt, its monetary policy is constrained by the need to attempt to raise and maintain public debt at low cost.