ECONOMYNEXT – State Minister for Money and Capital Markets, Nivard Cabraal is tipped to take over as Governor of the central bank after resigning his portfolio and parliamentary seat.
“It very likely,” Minister Cabraal said.
There has been strong speculation over the week that Minister Cabraal would be made central bank Governor.
Central Bank Governor W D Lakshman has also called a media conference unexpectedly for later Friday.
Under Sri Lanka’s monetary law, those holding political office cannot run the central bank.
Then-Governor Cabraal, along with Deputy Governor W A Wijewardene mostly maintained monetary stability during the peak of a civil war and the collapse of the Greenspan-Bernanke housing bubble in 2008-2009.
High interest rates channeled private savings to the budget, reducing domestic consumption and investment and part of foreign reserves was also used to provide convertibility to fleeing foreign investors with less than 100 percent sterilization.
However Sri Lanka’s attitudes toward the value monetary stability subsequently changed, analysts say with the US Federal Reserve also setting bad example firing a Powell Bubble despite a recovery in US credit and a sound banking system that can dispense credit.
Sri Lanka has had problems with pro-cyclical policy for decades where recoveries in private credit or widening deficits, or borrowings to finance energy subsidies are not accompanied by higher interest rates to balance the credit system, but new liquidity is added which boosts credit and imports and hits the credibility of a pegged regime.
Sri Lanka is now facing severe monetary instability with the central bank’s gross reserves falling and reaching the levels of reserve liability after giving convertibility to unprecedented liquidity injections which have boosted domestic credit and imports.
Though some imports have been restricted the credit has moved into new areas as state workers who were paid with the new money bought goods, deposited in banks or maturing bonds from past deficits were turned into reserve money through failed bond auctions, analysts have said. (Colombo/Sept09/2021)