Central Bank of Sri Lanka

Central Bank of Sri Lanka

Central Bank of Sri Lanka Central Bank of Sri Lanka
Headquarters	Colombo
Established	1950
Governor	Ajith Nivard Cabraal
Central bank of	Sri Lanka
Currency	Sri Lankan Rupee LKR (ISO 4217)
Website	Central Bank of Sri Lanka

The Central Bank of Sri Lanka is the monetary authority of Sri Lanka. It was established in 1950, two years after independence. The founder governor of the Central Bank of Sri Lanka was John Exter, while the minister of finance at the time was J.R. Jayawardena. Under the name Central Bank of Ceylon it replaced the Currency Board that until then had been responsible for issuing the country's money. It is a member of the Asian Clearing Union.

The Bank is responsible for the conduct of monetary policy in Sri Lanka and also has wide supervisory powers over the financial system.

Its credibility was called into question in 2007, due to allegations of political interference and institutional decay.

History

The Central Bank of Ceylon was set up by the post independence Government in recognition of the importance of an active monetary policy regime and a dynamic financial sector to support and promote economic growth.

Prior to the establishment of the Central Bank, functions relating to central banking were conducted by the Currency Board System that was set up under the Paper Currency Ordinance No.32 of 1884.

After gaining political independence, the Currency Board System was considered inadequate and unsuitable for meeting the needs of a developing country and an independent nation. Therefore, in July 1948, the Government of Ceylon requested the United States Government for technical expertise to set up a central bank, which resulted in Mr. John Exter, an economist from the Federal Reserve Board of the USA being appointed to carry out this task.

The Exter Report on the rationale and the legal framework for the Central Bank was presented to the Government of Ceylon in November 1949 and led to its formation. The Central Bank of Ceylon was established by the Monetary Law Act (MLA) No.58 of 1949 and commenced operations on August 28, 1950. It was renamed the Central Bank of Sri Lanka in 1985.

The Central Bank was given wide powers to administer and regulate the entire money, banking and credit system of the country. The Central Bank was also given the sole right and authority to issue currency and it also became the custodian of the international reserves of the country. The objectives of the Central Bank as specified in the MLA in 1949 were;

a ) The stabilisation of domestic monetary values (maintenance of price stability).
b ) The preservation of the par value or the stability of the exchange rate of the Sri Lankan Rupee (maintenance of exchange rate stability).
C ) The promotion and maintenance of a high level of production, employment and real income in Sri Lanka.
d ) The encouragement and promotion of the full development of the productive resources of Sri Lanka

a) and b) above, could be classified as stabilization objectives, while c) and d) could be classified as development objectives. The MLA gave the Central Bank wide powers in relation to the conduct of monetary policy to achieve its objectives. Therefore, the Central Bank was expected to play an important role in achieving these objectives, not only indirectly by maintaining monetary stability, but also directly by promoting the development and expansion of the financial system and directing credit to areas with the greatest development potential. However, the stabilisation and development objectives originally assigned to the Central Bank conflicted with each other, as under certain economic conditions, the monetary policy measures necessary to achieve the two objectives operate in opposite directions i.e., the stabilisation objective required the Central Bank to curtail the growth of money and credit, while the development objective required the Central Bank to expand the growth of money and credit.

Therefore, in keeping with the worldwide trends in central banking and the rapid changes in international financial markets, consequent to the economic liberalisation and the significant advancement in information technology, the Central Bank embarked on a modernisation programme in 2000.

Objectives

The Central Bank's focus and functions have evolved since its formation, in response to the changing economic environment. In keeping with trends in central banking, the objectives of the Central Bank were streamlined by amending the Monetary Law Act (MLA) in 2002, to enable it to pursue its core objectives and to free it of the multiple objectives that were originally assigned to it. The Central Bank has two core objectives:

• Maintaining economic and price stability
  
• Maintaining financial system stability
  

With a view to encouraging and promoting the development of the productive resources of Sri Lanka.

Prior to the amendment of the law, the Central Bank had multiple objectives, which could sometimes be in conflict or be inconsistent with each other.

Meanwhile, a consensus had developed internationally that a central bank's primary goal should be the maintenance of price stability. As price stability is crucially dependent on stable macroeconomic conditions, one of the core objectives of the CBSL was therefore specified as "economic and price stability". Furthermore, as the experience of other countries has demonstrated, the stability of the financial system is crucial in improving the resilience of the economy. Hence, financial system stability was also identified as a core objective of the CBSL. The two objectives are correlated and complement each other. Ensuring financial system stability is of prime importance, as monetary policy is transmitted through financial intermediaries (institutions) to achieve price stability. Hence, the two objectives are in harmony and this enables the Central Bank to perform its main functions more effectively. The CBSL has been given a high degree of autonomy to achieve its objectives. In this task, the Bank closely liaises with the Ministry of Finance in making policy decisions and the Secretary to the Ministry of Finance is a member of the Monetary Board, which is the governing body of the CBSL.

Economic and Price Stability

Price stability safeguards the value of the currency in terms of what it will purchase at home and in terms of other currencies. Price stability or stable prices means low inflation. Experience has shown that the economy performs well when inflation is low and is expected to be low. Interest rates are also low in these conditions. Such an environment allows an economy to achieve its growth potential and fosters high employment. Free from the disruptive effects of high and variable inflation, both consumers and producers make economic decisions with confidence. Low inflation or price stability fosters sustainable long-term economic growth and employment. The Central Bank uses monetary policy measures to control inflation.

Financial System Stability

A stable financial system creates a favorable environment for depositors and investors, encourages efficient financial intermediation and the effective functioning of markets, and hence, promotes investment and economic growth. Financial system stability means the effective functioning of the financial system (financial institutions and markets) and the absence of banking, currency and balance of payments crisis. Financial instability is caused by bank failures, excessive asset price volatility, and collapse of market liquidity or a disruption to the payments system. Financial system stability requires a stable macro-economic environment, effective regulatory framework, well organised financial markets, sound financial institutions and safe and robust payments infrastructure. The maintenance of financial stability entails the prevention, detection and reduction of threats to the financial system as a whole, through the surveillance of markets and financial institutions, oversight of the payments system and crisis resolution.

Functions of the Bank

In order to achieve its core objectives as well as to discharge its responsibilities as economic advisor and banker to, and agent of the GOSL, the CBSL undertakes the following functions.

Core functions

• Economic and Price Stability
• Financial System Stability

Ancillary to core functions

• Currency Issue and Management

Agency functions

• Employees' Provident Fund Management
• Foreign Exchange Management
• Public Debt Management
• Regional Development

Monetary Board

The Central Bank has a unique legal structure in which the Central Bank is not an incorporated body. In terms of the Monetary Law Act, the corporate status is conferred on the Monetary Board, which is vested with all powers, functions and duties. As the governing body, the Monetary Board is responsible for making all policy decisions related to the management, operation and administration of the Central Bank.

The Monetary Board of the Central Bank consists of five (5) members

• The Governor
• The Secretary to the Ministry of Finance ( ex-officio )
• Three (3) non - executive members

The Governor is the Chairman of the Monetary Board and also functions as the Chief Executive Officer of the Central Bank. The Governor and the non-executive Board members are appointed by the President, on the recommendation of the Minister of Finance. The approval of the Constitutional Council is also required for the appointment of the non-executive Board members. The term of office of the Governor and the non -executive Board members is six (6) years. The quorum for Monetary Board meetings is three (3) members. The concurrence of three (3) members is required for decisions of the Monetary Board to be valid. However in cases where a unanimous decision is required, the concurrence of all five (5) members is necessary.

Regional Development

CBSL has established three Regional Offices at Matara, Anuradhapura and Matale with a view to promoting regional economic activities with the assistance of the banking sector. The first Regional Office was opened at Matara in 1981 and the second and third Regional Offices at Anuradhapura and Matale in 1982 and 1985, respectively. With a view to enhancing the development activities in the Northern Province, CBSL opened its fourth Provincial office in Jaffna on 04.07.2010.

Areas of Operation

With a view to be in line with provincial administration system of the country CBSL recently renamed the Regional Offices to read as provincial offices.

Areas of Operation of Provincial offices

• Provincial Office -Southern Province- Galle, Matara, Hambantota and Monaragala Districts
• Provincial Office - North Central Province - Anuradhapura, Polonnaruwa Districts
• Provincial Office - Central Province - Kandy, Matale, Nuwara Eliya and Badulla Districts
• Provincial Office - Northern Province - Jaffna, Mullaitivu, Kilinochchi, Mannar and Vavunia Districts

However, depending on the requirement, Provincial Offices may also carry out development activities in other districts which are not covered by above Provincial Offices.

The objectives of the Provincial Offices include supporting implementation and coordination of key functions of the CBSL in the provinces and promoting the rural economy by facilitating the smooth and timely supply of financial assistance, guidance and marketing linkages and coordination of related support services to the provinces in order to promote economic growth. It also includes contributing to the reduction of poverty and upliftment of economic and social conditions in the relevant provinces through various development activities.

The Governors

• John Exter (1950-1953)
• N.U. Jayawardena (1953-1954)
• Sir Arthur Ranasinghe (1954-1959)
• D.W. Rajapatirana (1959-1967)
• W. Tennekoon (1967-1971)
• H.E. Tennekoon (1971-1979)
• W. Rasaputram (1979-1988)
• H.N.S. Karunatilake (1988-1992)
• H.B. Dissanayaka (1992-1995)
• A.S. Jayawardana (1995-2004)
• Sunil Mendis (2004-2005)
• Ajith Nivard Cabraal (2006 to date)

Education

The Central Bank possesses a valuable pool of human resources with updated knowledge and experience in the fields of economics, banking and finance. The Central Bank conducts various educational and public awareness programmes to share this knowledge with the public.

The Center for Banking Studies offers a wide range of courses throughout the year. The Public Lecture Series is conducted for academics and the general public who are interested in updating their knowledge on current issues in economics and finance.

Awareness Programmes are conducted by the Communications Department in association with other departments of the Bank to disseminate information and enhance understanding of developments in the economy and financial sector.The Bank has many publications through which it disseminates information on the economic, financial and social conditions in the country.

The Central Bank Currency Museum maintained by CBSL has a valuable collection of old coins and currency notes and the public is welcome to visit the museum by appointment.

See also

• Sri Lankan rupee
• Central Bank bombing

External links

• Central Bank of Sri Lanka (official website)