By: Staff Writer
February 04, Colombo (LNW): The Central Bank unveils an ambitious policy agenda: inflation stabilisation, a fostered economy, and financial stability for 2025 and beyond.
Governor Nandalal Weerasinghe indicated the commitment of the institution to inflation stabilisation at 5 percent within its flexible inflation targeting framework and supported sustainable economic growth in the medium term.
A Data-Driven Approach to Monetary Policy
The CBSL is envisaging a more forward-looking and data-driven approach to monetary policy formulation through enhancing the macroeconomic modeling setup and alternative frameworks.
This process encompasses building up sound research culture within the institution that underpins policy analysis. The implementation of monetary policy under a unified policy interest rate mechanism is proposed to be made effective through the shift to a more market-friendly Open Market Operations system in 2025.
It also aims to further develop the onshore foreign exchange market by introducing a benchmark spot exchange rate that would guide all market participants and the general public. This will further improve transparency and facilitate better management of exchange rate risks.
Commitment to Economic Reforms
Governor Weerasinghe acknowledged that Sri Lanka was recovering faster than was expected compared to other countries that have faced similar economic crisis situations but noted that long-term stability is what the country really needs at present.
He said recovery can be sustained if the country enacts the necessary economic reforms. “A transformative growth acceleration is critical to enhance the country’s debt-carrying capacity and unlock its growth potential,” he pointed out.
The priority of the CBSL is to build buffers that will enable the economy to absorb such shocks, while recording non-inflationary growth with financial stability.
Strengthening Financial System Resilience
Accordingly, various policy measures are in place to strengthen financial stability, one of which involves the Bank Recapitalisation Strategy.
In this regard, and in conformity with this strategy, nine major banks in the domestic system have already submitted board-approved recapitalisation plans that will be monitored semi-annually for their compliance with minimum capital requirements.
The road map for restructuring also encompasses areas such as corporate governance, liquidity ratios, and related-party transactions under the Banking (Amendment) Act.
Accordingly, CBSL would facilitate the conducting of offshore banking operations in collaboration with the Colombo Port City Economic Commission through an appropriate regulatory and supervisory regime.
Strengthening the Non-Bank Financial Institution (NBFI) Sector
The sector of nonbank financial institutions would remain a focus area for CBSL, which was envisioned to be pursued in two stages:
Phase I: Eight successful amalgamations of finance companies.
Phase II: From December 2024, this will extend for three years into 2025–2028 to provide for enhanced resilience in finance companies intending to operate independently. This development will then be monitored to achieve agreed thresholds.
The Finance Business Act, No. 42 of 2011, and the Finance Leasing Act, No. 56 of 2000, will be amended with a view to encouraging risk management and sector stability.
The CBSL is also in the process of automation of supervisory processes and further strengthening public disclosures for better transparency and accountability of the NBFI sector.
Coordination for Policy Consistency
To that effect, Governor Weerasinghe outlined effective coordination through proper alignment at fiscal, monetary, and financial stability policy between the CBSL and the government.
In that light, a Coordination Council under the Central Bank Act meets quarterly and meets for general purposes with views on macro conditions and policy gap alignments.
CBSL also liaises with the government stakeholders through the FCMC and FSOC to plan for crisis and mitigate coordination failures, and this in turn, helps to achieve a stable financial system.
Transparency and Accountability
The CBSL maintains transparency in continuous dialogue with governmental officials and members of parliamentary standing committees. Such briefings have, among other things, covered monetary and financial policy updates, their outcomes, and the progress toward mitigating bottlenecks constraining economic activities.
Looking Ahead
The Central Bank’s agenda reflects a clear focus on ensuring macroeconomic stability, fostering growth, and reinforcing the financial system. A combination of reforms, forward-looking policies, and strong collaboration with the government underpins CBSL for a resilient and prosperous economy.
