HISTORY OF CENTRAL BANK

• Prior to the establishment of the Central Bank, the Currency Board System set up under the Paper Currency Ordinance No.32 of 1884 functioned as the country’s Monetary Authority, though very narrow in its capacity. This system was deemed inadequate for a developing country upon gaining political independence.
• Technical expertise to establish a central bank was sought from the United States of America (USA) in July 1948, with Mr. John Exter, an American economist from the Federal Reserve of USA being appointed to carry out this task. 
• The Exter Report on the rationale and the legal framework for a central bank was presented to the House of Representatives in November 1949. Along with this report, a draft bill with explanatory comments was presented as part II of the report. The Bill was passed by the House as the Monetary Law Act No. 58 of 1949 on 25 November 1949, paving the way for the establishment of the Central Bank of Ceylon and an end to the Currency Board System. The Central Bank of Ceylon was established by the Monetary Law Act (MLA) No.58 of 1949 and commenced operations on August 28, 1950. It was renamed the Central Bank of Sri Lanka (CBSL) in 1985.
• The Central Bank was given wide powers to administer and regulate the entire money, banking and credit system of the country. The Central Bank was also given the sole right and authority to issue currency and it also became the custodian of the international reserves of the country.

Prior to establishment of the central bank, relating to central banking were conducted by the currency board system that was set up under the paper currency ordinance No: 32 of 1884. The central bank of Ceylon was established by monetary law act (MLA) no: 58 of 1949. Then their operations on august 28, 1950.it was renamed the central bank of Sri Lanka in 1985. 

In July 1948, the government of Ceylon requested the United States government for technical expertise to set up a central bank. Mr. John Exter is a beginner of central bank. The position is currently held by economist Indrajit Coomaraswamy. In keeping with trend in central banking, the objectives of the CBSL were streamlined by amending the MLA in 2002, to enable it to pursue two core objectives. These are,  

I. The maintaining of economic and price stability 

That refers to both internal and external price stability in the country. It is main objective to slow down inflation rate.

 II. The maintaining of financial system stability. 

Stable financial system creates a favorable environment for depositor and investors. Financial system stability refers to the effective functioning of the financial system and absence of financial crisis. The CBSL has a unique legal structure where the Monetary Board is conferred with the corporate status and vested with all powers, functions and duties. Monetary board 

 Responsible for making all policy decisions and for the management, operation of the CBSL. The Monetary Board of the CBSL consists of five (5) members. 

•  The Governor 
•  The Secretary to the Ministry of Finance 
•  Three members of non – executive members. 

 REGULATION & SUPERVISION OF NON BANK FINANCIAL INSTITUTION 

CBSL relevant regulation and supervisions are, Monetary law act (MLA) No: 58 of 1949 & payment and settlement systems act No: 28 of 2005. Bank powers, functions and responsibilities are represented by their act payment and settlement act provide for the regulation of payment, clearing and settlement. The CBSL is responsible for providing payment and settlement facilities for commercial banks and primary dealers. 

The regulation and supervision of bank by the CBSL is based on the internationally accepted standard set out by the Basel committee 

DUTIES & RESPONSIBILITIES 

The primary function of central bank is to control the money supply in the economy.it is responsible for issuing currency on behalf of the government. Additionally, 

•  Conduct of monetary policy. 
• Conduct of exchange rate policy. 
•  Management of the official international reserves. 
• Oversight of the financial system. 
• Licensing, regulation and supervision of banks and selecting non – bank financial institutions. 
• Provision of settlement facilities and the regulation of the payment system 

 In addition, the CBSL also performs the following agency functions on behalf of the Government of Sri Lanka:

•  Management of the public debt. 
•  Foreign exchange management. 
• Fund management and acting as the custodian of the Employees’ Provident Fund Facilitating financial inclusion

MONETARY POLICY VS FISCAL POLICY

Monetary policy is typically implemented by a central bank, while fiscal policy decisions are set by the national government. However, both monetary and fiscal policy may be used to influence the performance of the economy in the short run.

In general, a stimulative monetary policy is expected to improve the economy's rate of growth of output (measured by Gross Domestic Product or GDP) in the quarters ahead; tight or restrictive monetary policy is designed to slow the economy in the future to offset inflationary pressures. Likewise, stimulative fiscal policies, tax cuts, and spending increases are normally expected to stimulate economic growth in the short run, while tax increases and spending cuts tend to slow the rate of future economic expansion

•  MONETARY POLICY

The Federal Reserve Act lays out the goals of monetary policy. It specifies that, in conducting monetary policy, the Federal Reserve System and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

Using the tools of monetary policy, the Federal Reserve can affect the volume of money and credit and their price-interest rates. In this way, it influences employment, output, and the general level of prices.

• FISCAL POLICY

Generally speaking, the aim of most government fiscal policies is to target the total level of spending, the total composition of spending, or both in an economy. The two most widely used means of affecting fiscal policy are changes in government spending policies or in government tax policies.

If a government believes there is not enough business activity in an economy, it can increase the amount of money it spends, often referred to as stimulus spending.