What went wrong and how to correct them, according to CB Governor

By Shyam Nuwan Ganewatta and Shiran Ranasinghe

In 2020, the Central Bank made wrong decisions on the interest, and exchange rates, and these errors led to the current economic crisis, CBSL Governor Dr. Nandalal Weerasinghe, on Thursday, said.Addressing a lecture on the proposed Central Bank Act, he said that interest and exchange rates are excellent methods of keeping an unhealthy demand in check.

“You can’t have a stable economy by artificially controlling interest and exchange rates. We kept bank rates at five percent and everyone took loans. Now they can’t pay back the loans. We also kept the US dollar at 202 rupees and we ran out of reserves. Ultimately we had to declare bankruptcy,” he said.

Dr. Weerasinghe said that the state and state-owned enterprises are the biggest debtors in the country. There are more debtors than those with savings in the country, he added.

“There are a lot more people spending foreign currency than earning them. If we ask the people they might say we should keep the dollar at 203 rupees, but the Central Bank has to take unpopular, but right decisions,” he said.

Weerasinghe said the new legislation will prioritise controlling inflation and introduce an inflation target. The Finance Minister, and the Central Bank, would, together, decide what that target should be, he said.The CBSL Governor said the new Bill will establish two new mechanisms, instead of the monetary board that exists now.

Although the Secretary to the Treasury is now a member of the Monetary Board, he will not have such an influential position, with the new Act, he said. A separate governing board, consisting of six members, and the governor, will be formed, in addition to the Monetary Board, he added.

“The main point of this legislation is to empower the Central Bank to make the right decisions, not popular decisions,” Weerasinghe said.

“With this new law, a Central Bank governor can work independently and make decisions that cannot be changed, according to the whims of the government in power.”

The Governor added that with the new Act the Central Bank has to issue an inflation report, every six months, and will need to provide explanations to a parliamentary committee on its performance, as and when necessary, Weerasinghe said.