By Sanath Nanayakkare
Dr. Nandalal Weerasinghe, the Governor of the Central Bank of Sri Lanka said on Friday that independence of the Central Bank is a vital factor for a country to ensure its economic development on a steady path without deviating from it for political reasons.
He made this remark at the press conference, after announcing the monetary policy rates determined by the Monetary Board of the Bank.
“We all know that Central Bank independence is an important factor for any country to succeed in economic development. It is a historically proven fact. If you look at our experience in the past couple of years of Monetary Expansion, the Modern Monetary Theory and the reversal of the Inflation Targeting Regime – those were the reasons that led us to the current situation. All the countries that have been able to successfully control the inflation have had independence of their Central Banks. And in contrast, when you look at countries such as Zimbabwe, Venezuela- they have hyper-inflation. One of the main reasons for that is they don’t have the required independence. It is clearly a proven fact that Central Bank should be independent to conduct its duties to ensure stability and steady economic growth. There should be no room left for monetary policy decisions to become popular decisions. Such critical decisions should not be decisions made by the elected people. They should be made by unelected, independent institutions which are accountable to the parliament and the general public in conducting the country’s monetary policy. That is why the Central Bank needs to be independent. In such circumstances, we will be able to make decisions independently from the parliament and the elected representatives because they have an ‘incentive’ to make popular decisions, but the Central Bank doesn’t. The Central Bank is not prone to making popular decisions and it’s supposed to make the right decisions as the situation demands without considering the popularity or unpopularity of those decisions. This is the fundamental reason why the Central Bank needs to be independent. This is my view and others may have different views about it; which are fine,” he said.
The Governor also said that the exchange rate has a direct impact on inflation and the cost of living.
“With the rupee strengthening against the USD, there should be favourable adjustments on essential imports in the time ahead,” he said.
“Prices need to reduce going forward. The exchange rate should reflect a positive impact on oil and LP gas imports which are done periodically. These numbers should reflect on the cost of these key imports and thereby on the cost of living,” he said.
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