Though Sri Lanka introduced independence to the Central Bank, alongside a separate public debt office in its pursuit of good governance, its agencies have not prioritised competence, particularly with regards to inflation targeting and interest rate spread, Verité Research Founder and Head of Research Nishan De Mel said.
He was speaking at a panel discussion hosted by First Capital, held last week.
Referring to the CBSL Act No. 16 of 2023, De Mel said: “We passed a law that gave the Central Bank significant independence, because we thought that the problem for Central Bank’s success, and monetary success was politics.”
To emphasise his statement, he pointed out the Central Bank’s management of the inflation pathway prior to Q2 2026, which tread below the target of 5% between Q2 2024 and Q1 2026.
“The failure we have seen since we did that was so profound, because we missed by such a huge margin – the inflation pathway for eight quarters in a row.”
As noted by the CBSL in its Report on the Deviation of Headline Inflation released in March, Sri Lanka’s quarterly headline inflation remained below the target for eight consecutive quarters.
“Under the law they’re required to go and explain to parliament what had happened, but of course parliament doesn’t have the capacity to question them. All that does is add debt-to-GDP and loss of buffers in reserves, among other things,” De Mel said.
Headline inflation has since remained above the target, as a consequence of the Middle East conflict, sharp upwards adjustments to domestic energy and transport prices, and strengthening domestic demand.
“So the Central Bank’s management of one target with political insulation, gives us an indication that we have a more serious issue than independence from politics.”
Referring to the Public Debt Management Act. No. 33 of 2024, under which the Public Debt Management Office had been established, de Mel said: “So we thought; why don’t we do good governance and separate the Public debt department from the Central Bank, put it in a new place. That is not about independence and having a new place, it’s about competence.”
He further added that the stark gaps seen in Weighted Average yields and accepted yields at government debt auctions, has caused uncertainty and likely even long term lack of confidence in the debt market.
“We have done the mapping; the spread between the Weighted Average and the cut-offs have hit record levels, you can’t see this in five years of data; not even in the highest times of volatility.”
‘So the spread has gone crazy. What does it do? It has created uncertainty, volatility; it has permanently increased the risk premium on the economy. Now these are what is hurting the economy.”