Saturday Aug 30, 2025
Saturday Aug 30, 2025
Saturday, 30 August 2025 01:39 - - {{hitsCtrl.values.hits}}
CBSL Governor Dr. Nandalal Weerasinghe
By Devan Daniel
Governor Dr. Nandalal Weerasinghe yesterday busted prevailing misconceptions and myths about the role of the Central Bank of Sri Lanka (CBSL), explaining how recent legislative measures have bolstered its independence and laid the platform for the monetary authority to move away from conflicting legacy roles like managing public debt and initiating concessionary loan schemes for targeted industries and economic sectors.
Historically, the CBSL was tasked with multiple, often conflicting roles: controlling inflation (monetary policy), influencing interest and exchange rates, financing fiscal deficits (through money printing and deficit monetisation), and managing public debt. That overlap is exactly what weakened credibility and exposed the bank to criticism. But that all changed after the country’s worst economic crisis, with Dr. Weerasinghe being credited with the positive changes at the monetary authority.
Addressing the 75th Anniversary Oration of CBSL on ‘Why Central Bank Independence Matters – in Crisis, in Recovery, and Beyond,’ Dr. Weerasinghe also reiterated that CBSL was no longer managing the exchange rate, nor was it financing fiscal spending as in the past.
“Central Bank independence is not a new concept. Unfortunately, Sri Lanka had to learn about it the hard way only recently,” he said.
In a lecture that took the audience comprising CEOs in banking, specialised lending institutions, primary dealers, and corporate and public sector officials through the genesis of CBSL since its founding in 1950, and how global experiences have increasingly demonstrated the ability of independent central banks to consistently insulate their economies from global downturns, from the 1997 East-Asian crisis to the 2007 global financial crisis, Dr. Weerasinghe explained why CBSL independence was critical for Sri Lanka.
The highlight of the keynote was the section on addressing common myths and criticism.
Quoting Indian Economist Raghuram Rajan who said, “any public job involves both undue praise and unfair criticism… yet it is the latter that is probably more useful in helping you sharpen your message,” Dr. Weerasinghe used this to frame his remarks on the criticisms and misconceptions surrounding the Central Bank.
The first misconception he took on was that an independent Central Bank acts in isolation and avoids coordination with the Government. He explained that independence does not mean separation. The Central Bank Act of 2023 established a statutory Coordination Council where representatives of the Central Bank and the Ministry of Finance meet quarterly to assess economic and financial conditions, identify risks, and coordinate decisions. The bank also continues to work with the Government, multilateral agencies, and regulators through committees such as the Financial Sector Crisis Management Committee and the Financial System Oversight Committee.
The second myth is that the Central Bank is accountable only to external institutions such as the IMF.
Dr. Weerasinghe emphasised that the CBSL is a State institution established under the Constitution and accountable to Parliament and to the people. The new Act provides for oversight by requiring the Governor and senior officials to appear before Parliament or its committees at least once every four months.
“Unlike in the past, the CBA now mandates that Parliament or its Committees summon the Governor, Board members, and Deputy Governors at least once every four months to review the CBSL’s functions. If any policy or operation is perceived to deviate from the CBSL’s mandate, it can be questioned during these sessions, ensuring strong democratic oversight.” He said Sri Lanka’s IMF program is consulted on with the Fund but fully owned by the Government.
A third misunderstanding is that financial independence is new. He noted that even under the Monetary Law Act of 1949, the Central Bank approved its own budget and operated without reliance on Government allocations. The 2023 Act retained this structure and added clearer rules on profit transfers and recapitalisation, ensuring the bank can maintain capital strength and independence. All expenditure remains subject to governance, Board oversight, and external and independent audits.
The fourth misconception relates to unrealistic expectations of what the Central Bank can deliver.
“Misunderstanding the CBSL’s objectives and functions often leads to unrealistic expectations about what the CBSL can deliver and how it should operate.” The CBSL’s role is to maintain price stability and safeguard financial stability.
“A frequent misconception is why the CBSL does not directly promote economic growth or development. Questions often arise as to why the bank does not actively empower businesses, particularly MSMEs, promote exports, develop industries, or alleviate poverty. The answer lies in our mandate: the CBSL’s role is to create an enabling environment of stability, within which the Government and other authorities can implement growth-oriented policies.”
He added, “History has shown that when central banks pursue multiple, often conflicting objectives with limited tools, the result is inefficiency and instability. Central banking is fundamentally about stability.”
Another common misunderstanding is that the Central Bank fixes the exchange rate.
“Under the current flexible exchange rate regime mandated by the CBA, the value of the Sri Lankan rupee is determined by market forces of supply and demand. The CBSL intervenes only to build reserves and smooth excessive volatility, not to fix or target a specific rate. When these roles are misunderstood, criticism could arise, especially when difficult but necessary policy decisions are made in the long-term interest of the economy,” Dr. Weerasinghe said.
Finally, he addressed the issue of agency functions.
Since 1950, the Central Bank has been tasked with managing public debt, the Employees’ Provident Fund, exchange control, financial intelligence, and regional development. These responsibilities were assigned because of public trust in the institution and the lack of alternative agencies.
However, “some of these functions have resulted in conflicting objectives for the CBSL, necessitating the establishment and strengthening of firewalls in the governance structure of the CBSL. At times, allocation of resources to carry out agency functions is a severe strain on human resources and dilutes the core functions of the Central Bank,” Dr. Weerasinghe noted. He said concessional loan schemes have been phased out, and public debt management is being shifted to a newly established Public Debt Management Office under the Ministry of Finance.
“Looking ahead, as the market matures and suitable institutional arrangements are made, the CBSL has no objection to transferring the remaining agency functions out of the Central Bank as well. This will enable us to focus fully on the CBSL’s core objectives and better utilise our resources towards maintaining stability.”
Dr. Weerasinghe concluded that protecting the Central Bank’s independence is indispensable in an unpredictable political and economic environment. Clear mandates, accountability to Parliament, transparency in policy actions, and strong communication with the public are necessary for building trust. Independence, he said, does not mean separation, and coordination with Government remains essential for effective macroeconomic management. Recent crisis experience showed that collaboration based on respect for roles can accelerate stability and recovery.
“Having witnessed both the benefits of independence and the costs of its absence, I firmly believe it is the responsibility of future generations to protect, preserve, and promote the independence of the Central Bank. Only then can it continue to serve as a steadfast anchor of stability – an essential foundation for sustainable growth and shared prosperity,” the CBSL Governor said.
