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History

Brief History
The Central Bank of Ceylon was set up by the post independence Government in recognition of the importance of an active monetary policy regime and a dynamic financial sector to support and promote economic growth.

Prior to the establishment of the Central Bank, functions relating to central banking were conducted by the Currency Board System that was set up under the Paper Currency Ordinance No.32 of 1884.

After gaining political independence, the Currency Board System was considered inadequate and unsuitable for meeting the needs of a developing country and an independent nation. Therefore, in July 1948, the Government of Ceylon requested the United States Government for technical expertise to set up a central bank, which resulted in Mr. John Exter, an economist from the Federal Reserve Board of the USA being appointed to carry out this task.


Mr. John Exter


The Exter Report on the rationale and the legal framework for the Central Bank was presented to the Government of Ceylon in November 1949 and led to its formation. The Central Bank of Ceylon was established by the Monetary Law Act (MLA) No.58 of 1949 and commenced operations on August 28, 1950. It was renamed the Central Bank of Sri Lanka in 1985.

The Central Bank was given wide powers to administer and regulate the entire money, banking and credit system of the country. The Central Bank was also given the sole right and authority to issue currency and it also became the custodian of the international reserves of the country. The objectives of the Central Bank as specified in the MLA in 1949 were
;

a ) The stabilisation of domestic monetary values (maintenance of price stability).
b ) The preservation of the par value or the stability of the exchange rate of the
Sri Lankan Rupee (maintenance of exchange rate stability).
C ) The promotion and maintenance of a high level of production, employment and
real income in Sri Lanka.
d ) The encouragement and promotion of the full development of the productive
resources of Sri Lanka

a) and b) above, could be classified as stabilization objectives, while c) and d) could be classified as development objectives. The MLA gave the Central Bank wide powers in relation to the conduct of monetary policy to achieve its objectives. Therefore, the Central Bank was expected to play an important role in achieving these objectives, not only indirectly by maintaining monetary stability, but also directly by promoting the development and expansion of the financial system and directing credit to areas with the greatest development potential. However, the stabilisation and development objectives originally assigned to the Central Bank conflicted with each other, as under certain economic conditions, the monetary policy measures necessary to achieve the two objectives operate in opposite directions i.e., the stabilisation objective required the Central Bank to curtail the growth of money and credit, while the development objective required the Central Bank to expand the growth of money and credit.

Therefore, in keeping with the worldwide trends in central banking and the rapid changes in international financial markets, consequent to the economic liberalisation and the significant advancement in information technology, the Central Bank embarked on a modernisation programme in 2000. Accordingly, the objectives of the Central Bank are:

1 ) The maintenance of economic and price stability
2 ) The maintenance of financial system stability

with a view to encouraging and promoting the development of the productive resources of the country.
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