Need for an independent Central Bank

Sri Lanka is in a real crisis. There is a need for all stakeholders to understand this situation and have a contingency plan. The country has failed, in many ways, to manage the economy for the last few decades, and the time has come to make some serious decisions. In this context, there is a need to revisit the role played by main institutes in Sri Lanka. There should be drastic changes in governance. Newly-appointed Governor of the Central Bank of Sri Lanka (CBSL), Dr. Nandalal Weerasinghe had clearly said, “Sri Lanka is now in damage control mode,”. He has also stressed the need for ensuring the independence of the CBSL. “I will take steps to make the CBSL an independent organisation. I have also got many assurances that all parties will support me”.

I think it is imperative to have an independent CBSL and we need to consider this as a matter of priority in this worst economic downturn since independence. According to Klomp and Haan (2010) “During the last two decades, many countries granted their monetary authorities greater independence. It is widely believed that central banks otherwise will give in to pressure from politicians who may be motivated by short-run electoral considerations or may value short-run economic expansions highly while discounting the longer-run inflationary consequences of expansionary policies (Walsh, 2005)”.I believe this is really valid in Sri Lanka and authorities should take certain decisions on this for the betterment of the country. And also as per Cukierman (2008) “International Monetary Fund (IMF) embraced the view that a high level of independence is a desirable institutional feature and actively promoted CB reform in many developing economies through conditionality and other means,”

The time has come for everyone to think and act differently for the betterment of the nation. There is a need to get the service from professionals and people with the expertise’. More importantly   Göhlmann and Vaubel (2007) say that monetary policy committees, dominated by former central bank staff, produce considerably lower inflation than those dominated by former politicians and union leaders”. (Source : Ennser‐Jedenastik, L., 2014. Party politics and the survival of central bank governors. European Journal of Political Research, 53(3), pp.500-519.). This is applicable to all other institutions as well. The accountability factor of CB (or any other intuition) also need to be considered in this scenario as well.

It is imperative that all stakeholders including professionals, make a concerted effort save the country.

Professor Nalin Abeysekera