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Role of Central Bank of Sri Lanka on the current economic situation

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Question: Discuss the role of Central Bank of Sri Lanka critically and objectively based on the current economic situation in Sri Lanka.

Answer: The role of Central Bank of Sri Lanka critically and objectively based on the current economic situation in Sri Lanka are given as below:

• Involvement in monetary policy: Central Bank of Sri Lanka is the nodal agency which involves in the setting up of monetary policy. Through monetary policy, central bank aims to manage or balance the demand and supply of money within the economy during a period to attain equilibrium and achieve price stability. It is very essential for any economy to achieve price stability as it helps in controlling the inflation effect dramatically. The main objective under monetary policy is to determine a policy interest rate and to manage the liquidity within the economy. It is a very useful tool to control the inflationary pressure of any economy and thus the central bank should conduct such operations carefully and after assessing its impact on other fields.
• Involvement in exchange rate policy: Central Bank of Sri Lanka is the nodal agency which involves in the setting up of exchange rate policy. Through exchange rate policy, central bank aims to manage or balance the demand and supply of foreign currency within the economy during a period to attain equilibrium and achieve exchange rate stability. It is very essential for any economy to achieve exchange rate stability as it helps in controlling the depreciation of national currency dramatically. The main objective under monetary policy is to determine a build up the international reserve position of the nation as well as to limit the short-term volatility in the exchange rate.
• Supervision of financial system: Central Bank of Sri Lanka is the nodal agency for the supervision of the banking institutions of the nations. The main objective of the central bank in supervising the financial system is to limit the systematic risks of the economy. The systematic risks is such a risk that could lead to total disruption or collusion of the entire financial system of the country and thus central should always keep an eye on the performance of different banking institutions so that right decisions can be taken at the right to mitigate the loss to the maximum extent.
• Licensing, Regulating and Supervising of Banks and Selected NBFCs: Central Bank of Sri Lanka is the nodal agency for licensing, regulating and supervising of banking and non-banking institutions. It provides licenses to different banking and non-banking institutions after evaluation some of the criterion, regulate the operations of banking and non-banking institutions with detailed provisions laid down in various laws and supervise the operations to know if some corrective actions are required to be taken or all operations are done correctly.
• Regulation of the Payment System and Provision of Settlement Facilities: Central Bank of Sri Lanka is the nodal agency in regulating the payment system by appointing some committee and laying down specific provisions which can monitor the performance of payment system regularly. It also involves in the provision of settlement facilities by developing two main components i.e., RTGS system and Lanka secure system. The RTGS system is the fund settlement component of the Lanka Settle System which facilitates large value and eliminating settlement risks.
• Issue of national currency: Central Bank of Sri Lanka is the nodal agency involves in the issue of national currency. No other agency is allowed to issue currency on behalf of government. The central bank has the exclusive right under Monetary Law Act to issue national currency on behalf of the government. Thus, the central bank directly involves in the supply of national currency.
• Bankers to commercial banks and government: Central Bank of Sri Lanka acts as the bankers to commercial banks and government authorities by providing credit to them whenever they need. The central bank also maintain the current accounts of government authorities and timely provide advice to them. The central banks provides CBs and PDs to commercial banks to ensure efficient interbank payment and settlement.


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