Sri Lanka better off with currency board: Sally

ECONOMYNEXT – Sri Lanka would be better off with a currency board instead of a central bank which was politicised under the ousted Rajapaksa regime and needs to operate more independently, says Razeen Sally, a top international economist.

“Clearly, the independence of the central bank was compromised under the last government. The last central bank governor was very political,” he told a forum at Ceylon Chamber of Commerce.

Sally, a former London School of Economics Professor who is chairman of Sri Lanka’s Institute of Policy Studies, said he would like to see “de facto and de jure” central bank independence in terms of monetary policy.

Successful example of policy reform from Latin America, Eastern Europe and East Asia often involve central banks with credibility and with increasing independence, he said. 

“It was a big mistake to move from a currency board to a central bank,” Sally said.

“In an ideal world I’d like to see Sri Lanka get back to a currency board, something fixed and rigid with little discretion, at least until policy is put on a sustainable footing for the medium term and credibility restored,” he added.

“But that’s not in the offing at the moment.”

The Sri Lankan rupee has fallen sharply this year and is expected to weaken further next year, possibly to the 148-160 rupee to the US dollar level, according to forecasts by private sector economists.

The rupee has fallen 8.7 percent against the US dollar this year, hitting a record low of 143.80 on December 15 but recovering slightly later.

Sally, who has also been with the National University of Singapore, said the problem with Sri Lanka was that “there aren’t hard rules and external discipline on domestic irresponsibility, not just fiscal but monetary irresponsibility as well.”
 (Colombo/December 28, 2015)
 

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