Sri Lanka central bank is like a currency board: official

Sept 22, 2008 (LBO) – Sri Lanka’s monetary authority is now operating almost like a currency board and its currency issue is fully backed by reserves, a senior central banker has said.

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Sri Lanka abandoned a currency board that had kept inflation low, the exchange rate stable and allowed island to become a country with some of the highest living standards in Asia until a central bank with money printing powers was created in 1950.

Since then Sri Lanka has suffered chronic inflation and depreciation, repeated balance of payments crises, import controls, price controls, black markets and tight exchange controls that destroyed an emerging financial hub that had already started to finance firms abroad, through its stock market.

The central bank was reformed at the turn of the century, giving more importance to price stability rather than other objectives like employment or economic growth, following a devastating currency crisis.

But Wimal Hettiarachchi, a former director of economic research at the central bank, said high recent inflation sho