Sri Lanka’s future economic stability hinges on protecting the independence of its Central Bank, Governor Nandalal Weerasinghe said, warning that political interference had left the country vulnerable to its worst financial collapse in 2022.
Having witnessed both the benefits of independence and the costs of its absence, the CBSL Chief emphasized that it is the responsibility of future generations to safeguard, preserve, and promote Central Bank autonomy. “Only then can it continue to serve as a steadfast anchor of stability – an essential foundation for sustainable growth and shared prosperity,” he said.
Weerasinghe stressed that in an unpredictable political and economic environment, Central Bank independence is not merely important but “indispensable” to maintaining stability. Historical and global experience, he added, show that Central Banks with clear mandates, well-defined boundaries, and adequate operational autonomy are best positioned to deliver on price stability and financial security.
At the same time, he clarified that independence does not imply isolation. Constructive dialogue and coordination with fiscal authorities are essential for effective economic management, a framework now strengthened under the Central Bank Act (CBA) of 2023. Transparency and open communication, he added, are also vital to building public trust and safeguarding against undue influence.
Reflecting on Sri Lanka’s recent past, Weerasinghe noted that the 2022 crisis highlighted the dangers of compromised autonomy. Large fiscal deficits financed through monetary expansion, combined with global supply shocks, the rupee float, and higher taxes, pushed inflation to nearly 70% by September 2022. “The Sri Lankan public and businesses had to learn the hard way the repercussions of a lack of Central Bank independence and the consequences of fiscal dominance during the buildup to the 2022 crisis,” he said.
The Central Bank’s response, including raising interest rates to record highs, helped curb inflation and protect the financial sector from near-collapse. Weerasinghe emphasized that even in challenging circumstances, an independent Central Bank can restore stability and enable a rapid economic rebound.
He argued that Sri Lanka missed a critical opportunity in 2019 when a new Central Bank Bill failed to pass Parliament. Stronger legal protections could have prevented excessive monetary financing and ill-timed tax cuts that damaged the country’s external credit ratings. “Prohibiting monetary financing could have helped keep inflation under control. Moreover, the absence of Central Bank financing might have compelled the government to avoid reckless tax cuts,” he said, adding that a firm commitment to price stability under an inflation-targeting regime would have allowed the exchange rate to act as an automatic stabilizer.
Weerasinghe also noted that most stabilization measures during the crisis were carried out under the Monetary Law Act of 1949, proving that autonomy could be exercised even before the 2023 reforms, provided there was strong coordination with fiscal authorities.
Quoting European Central Bank President Christine Lagarde and former U.S. Federal Reserve Vice Chairman Alan Blinder, he highlighted that Central Bank independence is being tested globally, making it vital for Sri Lanka to protect reforms already in place. “Independence does not mean isolation. Our recent experience has shown that only a strong, independent Central Bank can help a nation navigate crises and lay the foundation for sustainable recovery,” Weerasinghe concluded.
