Thursday July 19, 2018

Sri Lanka has to stop creating artificial booms: CB Governor

Jul 04, 2016 12:49 PM GMT+0530 | 1 Comment(s)


ECONOMYNEXT - Sri Lanka's central bank has allowed politics to trump economics for most of its life and it has to stop creating artificial booms, newly appointed Central Bank Governor Indrajit Coomaraswamy said.

"We need as a central bank to get out of this cycle of stop-go policies, of creating artificial booms, through mis-aligned policies," he said in an inaugural speech to staff.

"If you look back from 1948, for most of the time, politics had trumped economics. It is our job to convince our politicians that good economics is good politics."

He said the responsibility of the central bank was to create a sound macro-economic fundamentals with financial sector stability.

In 1948 when Sri Lanka got independence from Britain, the country had a currency board which was set up in 1885, following the failure of the Oriental Bank  - which issued notes as a freebank until then.

From 1885, Ceylon rupee - the (Indian) rupee was originally silver backed - only moved when the price of silver changed compared to gold.

But within a year of the central bank's creation in 1951, money printing to finance the deficit and delay rate rises as fiscal policy deteriorated, forced exchange controls on the helpless population.

Currency collapses, high inflation, which impoverished the entire population and gave some benefits to the leveraged richer sections of society was the order of the day.

With a central bank, a goverment could deficit spend as it wa and impose backdoor sovereign default on all public and private debt through currency depreciation, instead of only public debt in the case of ordinary sovereign default like in Greece.

Coomaraswamy said the responsibility of the central bank was to create a sound macro-economic fundamentals with financial sector stability.

"The government elected by the people have sovereignty, reposed in them," he said. "However the Monetary Law sets out some very specific responsibilities in the central bank.

"It is up to us to fulfil those responsibilities in a technocratic, objective and free way. That is not to say we should be criticizing the government of the day. That is not our business. But there are channels through which we can get independence advice to the government."
"And I have spoke to our leaders about this - that the central bank does its work independently and in a technical way and discreetly advises the government abut what we think is the best way forward for those segments of policy and practice for which the central bank has responsibility." (Colombo/July04/2016-Update II)


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  1. Nimal July 04, 07:36 AM

    Any idea why the Oriental Bank collapsed? I have also heard about it.

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