Central bank to assist in development | Daily News

Central bank to assist in development

CBSL Governor Professor  W. D. Lakshman
CBSL Governor Professor W. D. Lakshman

The Central Bank of Sri Lanka is going to take active participation in the development of Sri Lanka. Governor Professor W. D. Lakshman said that indirect methods of monetary policy (through financial markets and interest rates) currently practiced are not as effective as direct credit allocation methods like subsidized interest rates, capital controls, credit ceilings, and targeted lending.

Prof. Lakshman cited Japan after the Second World War and the successful economies of East and Southeast Asia as having a high growth trajectory following the adoption of a developmental state structure.

Prof. Lakshman noted that a developmental state structure was not conceptually defined but rather a ‘practical combination of systems, institutions, and practices with a clearly laid out objective of achieving developmental objectives.’

“Market mechanisms and processes are carefully planned in a developmental state. They are closely monitored and guided by the state. In a socially planned state markets are allowed to function in specific areas.”

Prof. Lakshman expressed these views at the Central Bank’s 70th Anniversary Oration on August 28.

Governor noted that the comparative advantage of a country is dynamic and changeable. He said that Sri Lanka mainstream view in the 1990s changed towards the advocacy of a neoliberally understood independent Central Bank.

He criticized this view calling on proponents to realize that even in the strictest fiscal targeting regimes there was the goal of price stability at the maximum potential of the economy implying an indirect acceptance of full employment.

Prof. Lakshman categorized three instances of significant Central Bank assistance to the government being in 1980 following the open economy, in 2009 at the height of the civil conflict, and in 2020 following COVID-19.

The Central Bank is currently working on the formulation of a truly national development banking organization to facilitate credit to SMEs. They are also working on creating a credit guarantee organization.

He cited the past decade as being one of considerable decline in the par value of the rupee and stated that in 2019 the Central Bank intervened in markets despite scarce reserves to build confidence in the Rs.

Citing Prof. H. A. de S. Gunasekera, he said, “unlike countries where Central Banks were set up in post-war and interwar periods in Sri Lanka the Central Bank was set up on conditions of political indifference and apathy.”

The Governor was critical of John Exeter and claimed that his report had little concern for Sri Lankan issues of credit and money.

He claimed that Exeter was exaggerating on the extent of his findings and suggested that a Central Banking mechanism was superimposed on the country.

He however noted that in the 70 years there had only been minor changes to the governing legislation.