The Monetary Policy Roadmap 2017 released by the Central Bank of Sri Lanka (CBSL) this week provides an encouraging outlook for the Sri Lankan business community. The Ceylon Chamber of Commerce is encouraged by the future plans of the CBSL with regards to monetary policy, price stability, financial system stability and institutional reforms.
The Roadmap 2017 announced a shift in monetary policy making, towards a flexible inflation-targeting framework away from the current money supply targeting framework. This will be a progressive and ambitious shift, but would need to be implemented over time. Throughout Sri Lanka’s post-independence history, the dominance of fiscal imbalances in Sri Lanka has made independent and stable monetary policymaking challenging. As new research has shown, weak fiscal management can derail an inflation-targeting regime, and hurt the credibility of a monetary authority.
The moves to establish an independent public debt office or vest it within the Ministry of Finance can play a strong role in further strengthening Central Bank independence, as the current conflict of interest faced by the CBSL between being the banker to the government as well as managing interest rates needs to be resolved.
The Roadmap 2017 announced an important shift in thinking with regards to exchange rate management, from that seen in the past. The CCC supports the CBSL’s view that there should be greater flexibility in the LKR; for it to be determined by market forces but guarded against adverse speculation. The CCC agrees with the Governor’s assertion that the strategy followed in the past of intervening in currency markets by using valuable international reserves is not sustainable. Not only had this strategy led to a severe depletion of reserves, but the overvaluation of the LKR hurt the competitiveness of our exports. Nevertheless, the CCC recognizes that the Government would need to consider the impacts of a flexible LKR on imports of essential items. Cost of living concerns stemming from this should be tackled without resorting to an artificial defense of the LKR.
The Ceylon Chamber of Commerce welcomes the efforts by the Governor of the Central Bank and his team to place stronger emphasis on advanced analytics and forecasting tools to continually enrich monetary policy decision-making. Furthermore, steps being planned by the institution, as the banking regulator, to enhance supervision and early detection of risks, will support Sri Lanka’s ambitions of becoming a trusted and stable regional business centre. The CCC is keen to work closely with the CBSL to modernize regulations that affect international business operations of our members, particularly with regard to foreign exchange control and transactions in the digital economy.
Ongoing and planned actions announced in the Roadmap 2017, if implemented in a timely and consultative manner, can help strengthen the confidence of all stakeholders in the CBSL, position Sri Lanka as a strong and resilient economy, and create a conducive stable macroeconomic environment for business to thrive. The CCC urges all stakeholders to support the plans outlined by the CBSL in the Roadmap 2017 and the Governor’s endeavors to successfully implement these plans.