Financial Times - Role of the Central Bank in stimulating the private sector

The Federation of Chambers of Commerce and Industry of Sri Lanka recently hosted yet another important personality when it held the monthly Key Persons Forum in Colombo.

Ajith Nivard Cabraal, the Governor of the Central Bank who was the guest speaker on this occasion, presented an extensive account of the role of the Central Bank in the economy.

At the outset he said he would present a hypothetical scenario without the presence of the Central Bank. This meant that there would not be monetary control to ensure financial stability and also the absence of a proper financial system. The country would also be devoid of any regulatory mechanism so effectively undertaken usually by the Central Bank.

In such a situation he raised the question as to what monetary and fiscal discipline would prevail. On the contrary a kind of economic and social anarchy would then be the result.

Cabraal added that it was in this context that the Central Bank’s role was crucial to the country. Principally it had to perform certain statutory duties so that the country’s financial system together with the different banks would function smoothly. The Central Bank each day monitored and controlled the monetary and financial movements. The Central Bank also maintained a daily look at the monetary movements. For example one of its principal tasks was to examine the daily deposits of cheques and whether the different banks honored these cheques.

Cabraal emphasized the importance of this supervisory function of the country’s banks which would ensure financial stability.

This task was performed by the Bank’s Supervision Department. Referring to the legal enactments which empower the Central Bank Cabraal expressed the view that such legislation and the concurrent monitoring power that it derived from such legislation ensured an overall level playing field in respect of banking.

He added that Sri Lanka had to keep pace with other countries in terms of finance and monetary controls.

This would also entail the maintenance of economic stability and the observance of norms of a democratic country.

The Central Bank was a professional institution which had an inbuilt reservoir of talent and ability and in this connection it had an important role to play in the functioning of several regulatory institutions.

For example the Central Bank had a representative on the Securities and Exchange Commission and was also represented on a number of other statutory authorities and all these representations enabled the Central Bank to observe the workings of such institutions and the monitoring of their activities.

Referring to yet another principal activity of the bank Cabraal spelt out the work connected with the data and information collection and the socio economic surveys. The Central Bank’s Department of Economic Research was responsible for monitoring virtually the entirety of economic activity within the country.

These ranged from pricing trends in the country for consumer products to other data on health, population, and trading and industrial activity.

In referring to the dialogue with the private sector that the Central Bank maintained, Cabraal observed that such interaction was one of the statutory provisions covering the Central Banks activities.

It was an accepted fact that the vibrancy of the private sector depended to an extent on the interaction that the Central Bank had with private enterprise.

During the discussion, FCCISL President Nawaz Rajabdeen raised the issue of dormant bank accounts and fears that have been expressed recently that such accounts will be taken over by the government.

Cabraal said that dormant accounts did not contribute to the well being of the financial system and in that context the Central Bank was examining as to what action should be taken either to activate such accounts or terminate them.