Sri Lanka’s Central Bank yesterday called for greater powers from the announced restructuring of the institution by the government to better regulate the country’s financial system.

The country’s belligerent Finance Minister, Ravi Karunanayake repeatedly called for the restructuring of the Central Bank to prune its powers as he said the institution should confine itself to a regulatory and monitoring role instead of telling the government how to run the economy. 

However, the Central Bank Governor, Dr. Indrajit Coomaraswamy yesterday sought greater powers through the proposed restructuring exercise to enhance the credibility and independence of 
his institution. “I should also mention that the government has announced its intention to restructure the Central Bank. 

We would very much welcome a constructive restructuring process, which would upgrade processes and result in the reform of the Monetary Law and Banking Acts, particularly to give greater powers to the Central Bank to regulate the financial system. 

We are confident that such moves would be instrumental in enhancing the credibility of the Central Bank, while preserving the independence it needs to perform its roles effectively,” said Dr. Coomaraswamy, unveiling the bank’s 10th road, announcing its mid-term economic policies.  It is in the grapevine that Minister Karunanayake is seeking more powers to control the actions of the Central Bank lately to run the economy in a more cohesive manner  and he has also intimated his intensions to the Prime Minister Ranil Wickremesinghe, under whose ministry the Central Bank operates.

However, it was only recently the highly respected economist, Professor Razeen Sally, hinted at the attempts made by certain politicians to scuttle the progress made by Dr.Coomaraswamy at the Central Bank and to re-politicize the institution. 

He therefore urged the country’s citizenry to rally behind Dr. Coomaraswamy to ensure the independence of the Central Bank.   

“Of course there are governing politicians who seek to undermine him and to eat away the Central Bank’s authority and to re-politicize the Central Bank,” Professor Sally told a recent public seminar in Colombo.   An independent Central Bank through its monetary policy will stand against the fiscal excesses created by a government to ensure price stability in the economy, which in turn will lead to the creation of sound macro-economic policies. 

Speaking further, Dr. Coomaraswamy renewed his call for a re-balance in economics and politics in the economic decision making process, which has been made far too politicized during the last four decades, to ensure accelerated progress in the economy on a sustainable basis.

While commending the Prime Minister and the Finance Minister for the progress that has already been made, particularly in the fiscal front, he said it was imperative to have the clarity of purpose, focus and determination to continue to implement the necessary reforms. 

“However, the task now is to turn the good intentions into reality. This journey ahead requires re-balancing of economics and politics in economic decision making if we are to stay the course,” he stressed. 

Nevertheless, he added, “It is naive to believe that economics can be separated from politics.” 

Economy in hospital but not in ICU 

Sri Lanka’s economy is expected to have grown by between 4.5 percent and 5.0 percent during 2016 supported by stronger third and fourth quarter performance, but the economy is certainly not in good shape as it is under International Monetary Fund (IMF) assistance, claimed the Central Bank Governor, Dr. Indrajit Coomaraswamy. 

The short-sighted political masters ran loose both fiscal and monetary policies in 2015, creating a bubble, which busted the country’s finances and paved the way for continued support from the International Monetary Fund by way of an extended fund facility amounting to US $ 1.5 billion. 
“Having an IMF programme is the economic equivalent of being in the hospital. 

We are not in the ICU. But we are clearly in hospital,” quipped Dr. Coomaraswamy.   
“But the upside is that the remedial treatment is known and it is encouraging that it has commenced,” he stressed. 

According to Dr.Coomaraswamy, Sri Lanka is the only country other than Afghanistan under IMF assistance in the Asia-Pacific region.  After suffering a setback in the second quarter, which recorded an economic growth of 2.7 percent due to adverse weather conditions, Sri Lanka’s economic growth picked up by 4.1 percent in the third quarter mainly supported by the industrial sector that was propelled by the resumption of construction activities.  During the first nine months Sri Lanka’s economy grew by 9.0 percent.  “There is every prospect that growth in the fourth quarter would be fairly robust, partly because of the very positive base effects and the favourable trends shown from some of our leading indicators of our surveys,” he said.  Meanwhile, projecting economic growth for 2017, he said the Central Bank expects the growth to pick up to 5.5 to 6 percent amid “significant downside risks,” particularly from the extremely volatile global market conditions. 

According to Dr. Coomaraswamy, the higher economic growth in 2017 could stem from the higher investment activities— both domestic and foreign— stimulated by confidence of a stable economy.  He cited that foreign inflows are expected from the sale of 80 percent of Hambantota port and further inflows from extended projects by the Chinese in the construction sector.  However, prolonging of the prevailing drought condition could dampen the growth this year as such a situation would have severe implications on price levels as supply side could get disrupted. 

The Central Bank expects the inflation to continue to remain in mid-single digit levels of 4 to 6 percent in 2017. 

However, the economists opine that a weak rupee, continuing drought conditions, and rising global oil prices could accelerate inflation during the first half of 2017. 

CB announces major operational changes

The Monetary Board of the Central Bank will meet less frequently than in the past to set country’s interest rates, as the board will spend up to 6 weeks to analyze the developments of the economy and study the macro-economic forecasts based on newly designed models for more informed policy decisions, according to Central Bank Governor Dr. Indrajit Coomaraswamy. 

As a result, the Monetary Board will reduce its number of policy meetings to eight from the existing 12 starting from 2017. The Central Bank has already published a calendar with specific months and dates it would announce the monetary policy. 

To this end, the Central Bank has been developing new forecasting and modelling systems, some of which are with the assistance from the International Monetary Fund (IMF), to strengthen the monetary policy decision making process and also to support Sri Lanka’s transition into flexible inflation targeting regime from the existing monetary targeting. 

A separate modelling and forecasting division has also been set up in the economic research department and the staff is also trained to upgrade their technical capabilities to support the transition. 

Meanwhile, gross foreign reserves, which had depleted to US $ 5.6 billion by the end of November 2016, has increased up to US $ 6.0 billion by the end of the year with the support of swap arrangements and some loans and grants received from the Japanese government and the World Bank during December, Dr. Coomaraswamy said.  

The bank is also planning to issue rupee denominated bonds to reduce the foreign exchange risk.  The bonds will be listed in a foreign exchange as trading of domestic currency denominated bonds in a foreign exchange will also increase the liquidity while broadbasing the investor base. 

The Central Bank is currently in talks with EuroClear to settle trades in rupee securities. However, the process will take at least 12- 18 months.   Meanwhile, the Central Bank has also raised the minimum core capital of linseed finance companies and specialised leasing companies to Rs.2 billion and Rs.1 billion, respectively, from the existing Rs. 400 million and Rs.300 million.