Objectives

Objectives of Central Bank of Sri Lanka (CBSL)

The CBSL's focus and functions have evolved since its formation, in response to the changing economic environment. In keeping with trends in central banking, the objectives of the CBSL were streamlined by amending the Monetary Law Act (MLA) in 2002, to enable it to pursue its two core objectives and to free it of the multiple objectives that were originally assigned to it.

The Central Bank has two core objectives:

"Maintaining economic and price stability"

                                                   "Maintaining financial system stability"

With a view to encouraging and promoting the development of the productive resources of Sri Lanka. 

Prior to the amendment of the law, the Central Bank had multiple objectives, which could sometimes be in conflict or be inconsistent with each other. 

Meanwhile, a consensus had developed internationally that a central bank's primary goal should be the maintenance of price stability. As price stability is crucially dependent on stable macroeconomic conditions, one of the core objectives of the CBSL was therefore specified as "economic and price stability".  Furthermore, as the experience of other countries has demonstrated, the stability of the financial system is crucial in improving the resilience of the economy. Hence, financial system stability was also identified as a core objective of the CBSL. The two objectives are correlated and complement each other. Ensuring financial system stability is of prime importance, as monetary policy is transmitted through financial intermediaries (institutions) to achieve price stability. Hence, the two objectives are in harmony and this enables the Central Bank to perform its main functions more effectively. The CBSL has been given a high degree of autonomy to achieve its objectives. In this task, the Bank closely liaises with the Ministry of Finance in making policy decisions and the Secretary to the Ministry of Finance is a member of the Monetary Board, which is the governing body of the CBSL. 

Economic and Price stability

Price stability safeguards the value of the currency in terms of what it will purchase at home and in terms of other currencies. Price stability or stable prices means low inflation. Experience has shown that the economy performs well when inflation is low and is expected to be low. Interest rates are also low in these conditions. Such an environment allows an economy to achieve its growth potential and fosters high employment. Free from the disruptive effects of high and variable inflation, both consumers and producers make economic decisions with confidence. Low inflation or price stability fosters sustainable long-term economic growth and employment. The Central Bank uses monetary policy measures to control inflation. 

Financial System stability

A stable financial system creates a favorable environment for depositors and investors, encourages efficient financial intermediation and the effective functioning of markets, and hence, promotes investment and economic growth. Financial system stability means the effective functioning of the financial system (financial institutions and markets) and the absence of banking, currency and balance of payments crisis. Financial instability is caused by bank failures, excessive asset price volatility, and collapse of market liquidity or a disruption to the payments system. Financial system stability requires a stable macro-economic environment, effective regulatory framework, well organized financial markets, sound financial institutions and safe and robust payments infrastructure. The maintenance of financial stability entails the prevention, detection and reduction of threats to the financial system as a whole, through the surveillance of markets and financial institutions, oversight of the payments system and crisis resolution.