In a recent interview with Global CEO Magazine, Dr Nandalal Weerasinghe,
Governor of the Central Bank of Sri Lanka, offered key insights into the nation’s economic landscape and the central bank’s strategic initiatives.

Reflecting on the challenges and opportunities ahead, Dr Weerasinghe shared perspectives on monetary policy, financial inclusion, technological advancements, and international integration, highlighting the CBSL’s commitment to fostering resilience and sustainable growth.

Q: Can you provide an overview of the current situation of the economy in our country and share projections for its trajectory over the next five years?

In 2023, the Sri Lankan economy exhibited a strong comeback, spurred by the gradual restoration of macroeconomic stability due to the implementation of series of policy measures both by the Government and the Central Bank of Sri Lanka (CBSL), in response to the crisis.

Co-ordinated stabilisation policies adopted by the CBSL and the Government have improved investor confidence. Consequently, with uncertainties diminishing and positive changes evident across many macroeconomic indicators, the economy experienced positive growth in activity during Q3-2023 as well as Q4-2023…, following six successive quarters of decline. The overall real economic growth for 2023 experienced a moderate decline, with a contraction of 2.3 per cent attributed to the setback recorded in the first half of the year.
The positive growth momentum observed in the second half of 2023 is expected to continue in 2024 and the economy is anticipated to gradually reach its potential growth over the years.

The external sector displayed greater stability towards the latter part of 2023 reflecting continued improvements on many fronts. The notable reduction in the trade deficit supported by compressed imports, significant improvement in workers’ remittances and inflows to the services sector resulted in notable improvements in the current account in 2023. Improved foreign liquidity conditions along with improved market sentiments led to a notable appreciation of the exchange rate in 2023 as well thus far in 2024.

THE POSITIVE GROWTH MOMENTUM OBSERVED IN THE SECOND HALF OF 2023 IS EXPECTED TO CONTINUE IN 2024 AND THE ECONOMY IS ANTICIPATED TO GRADUALLY REACH ITS POTENTIAL GROWTH OVER THE YEARS.

The revenue based fiscal consolidation programme of the Government has helped in improving fiscal balances for 2023 and this trend is expected to continue in the near to medium term. The Government is expected to record a primary surplus in 2024 as well, and beyond and government revenue is targeted to be increased to over 15 per cent of the GDP by 2027. The expected completion in debt restructuring during this year is expected to help in restoring sovereign debt sustainability.

Q: Inflation control is a key aspect of maintaining economic stability. Could you discuss the current inflation rate and provide insights into the strategies employed by the Central Bank to control inflation? Additionally, what are the projections regarding inflation rates in the near future?

Inflation rose to historically high levels in 2022 stemming from adjustments to domestic administrative prices, domestic supply disruptions, the substantial depreciation of the Sri Lanka rupee against the US dollar and the lagged effects of extended period of relaxed monetary policy following the COVID-19 pandemic. With a view to countering rising inflationary pressures and anchoring inflation expectations, the Central Bank tightened monetary policy significantly since April 2022. Accordingly, CCPI based headline inflation (year-on-year), which peaked at 69.8 per cent in September 2022, decelerated to 1.3 per cent in September 2023. Inflation is expected to eventually converge to the targeted level in the period ahead and remain around the target level of 5 per cent over the medium term, supported by appropriate policy measures.

Q: How does the current economic situation in Sri Lanka impact the Central Bank’s monetary policy decisions?

The CBSL took measures to ease monetary policy since June 2023 and has been able to notably reduce market interest rates, amidst the moderation in yields on government securities. While the broader macroeconomic conditions and related indicators remain favourable, there have been several domestic factors that have posed challenges to the efficacy of the monetary policy stance. In terms of inflation, due to the increase in VAT as well as the increase in food prices, inflation rose and remained somewhat elevated in January and February 2024. However, the impact of the above changes is expected to be short-lived as inflation in March 2024 has already come down to 0.9 per cent.

THE CBSL HAS BEEN CONFERRED WITH SPECIFIC POWERS AND DUTIES TO ISSUE PRUDENTIAL REGULATIONS TO LICENSED BANKS. THESE PRUDENTIAL REGULATIONS ARE ISSUED BASED ON STATUTORY PROVISIONS.

Overall, the current macroeconomic situation remains much more conducive than a year before. The economic developments have been broadly in line with expectations and the prevailing monetary policy stance, although some challenges remain. However, as monetary policy formulation will continue to remain data-driven, incoming data will be a key factor among many other factors that will be closely monitored and considered to determine the future course of monetary policy action.

Q: What measures are the Central Bank taking to ensure a fair monetary policy amidst the challenging economic conditions?

In August 2023, the CBSL issued a Monetary Law Act (MLA) Order on maximum interest rates on rupee denominated lending products to bringing down the market interest rates in line with the reduction in policy rates, with the aim of improving monetary policy transmission to businesses and households.

This MLA Order has contributed significantly to transmit the accommodative monetary policy and reduce overall market lending interest rates in recent months. The CBSL stresses the need for all financial institutions to take swift actions to bring down market lending rates further to ensure the benefits of monetary policy easing measures are adequately passed on to businesses and households. Thus, the benefit of restoring price stability is anticipated to be passed to broader segments of the economy, while subsequent recovery in economic activity would benefit the public and the businesses.

Q: How does the Central Bank plan to address the need for a reasonable regulatory system to guide other banks in Sri Lanka?

The CBSL has been conferred with specific powers and duties to issue prudential regulations to licensed banks. These prudential regulations are issued based on Statutory provisions, Basel Core principles of the Basel Committee on Banking Supervision, local and international regulatory and market developments and international best practices adopted by other international regulators and markets. Therefore, the CBSL formulates and issues new regulations and reviews the adequacy of existing regulations in terms of the provision in the Banking Act and other relevant Acts, market developments, prudential requirements, and international regulatory developments with the aim of ensuring the safety and soundness of the banking sector and safeguarding the interests of depositors and other stakeholders of licensed banks in Sri Lanka.

Moreover, the CBSL initiated strengthening the legal and regulatory framework applicable for licensed banks. Accordingly, CBSL is in the process of amending the existing Banking Act, as the existing Banking Act No. 30 of 1988 was lastly amended in 2006. The amendments were drafted considering several other country practices in the region, Core Principles for Effective Banking Supervision issued by the Basel Committee on Banking Supervision, and the issues specific to banking sector in Sri Lanka. The key amendments proposed include strengthening minimum licensing requirements, corporate governance, shareholder suitability, subsidiarisation of foreign banks, as deemed necessary, bank ownership, acquisitions, mergers and consolidation, disposal of non-financial subsidiaries, consolidated supervision, accounts and audit, proportionality, large exposures, and related party transactions. Reasonable transitional periods have been granted to comply with certain amendments considering the current circumstances. In addition to the amendments to the Banking Act, certain key Directions such as Corporate Governance will also be reviewed and amended, where necessary, to be in line with the current developments.

Q: How does the Central Bank plan to foster alignment among other banks in Sri Lanka to promote reasonable economic development?

Being the regulator of licensed banks, CBSL has close co-ordination with all 30 licensed banks. The CBSL conducts monthly meetings chaired by the Governor of the CBSL with the Chief Executive Officers of licensed banks and discuss the recent economic developments, banking sector developments and regulatory expectations. In such meetings, the CBSL provides detailed information on the status of the economy and the banking sector, and the necessary actions to be initiated by banks to contribute to the economic growth and the development of the banking sector. Considering the recent developments in the country, enabling businesses to revive their economic activities and to support sustainable economic growth, the CBSL has informed banks to reduce the lending rates in line with the reduction in the policy interest rates.

THE CBSL IS IMPLEMENTING NUMEROUS MEASURES TO MODERNISE THE FINANCIAL SECTOR OF SRI LANKA, ESPECIALLY THROUGH IMPROVEMENTS IN REGULATORY FRAMEWORK IN RELATION TO PAYMENT AND SETTLEMENT SYSTEM AND THE BANKING SECTOR, PROMOTION OF DIGITAL TRANSACTIONS AND STRENGTHENING
OF DIGITAL PAYMENT INFRASTRUCTURE.

Furthermore, in order to facilitate the sustainable revival of businesses affected by the recent challenging macroeconomic circumstances and to ensure the proper handling of impaired assets of banks, the CBSL has issued broad guidelines on establishment of Business Revival Units in licensed banks. These units are expected to strengthen the recovery of businesses, especially SMEs and Corporates and also help improve the credit quality of banks. The Units aim to revive businesses that are facing actual or potential financial difficulties but are fundamentally viable, with a view to providing benefits to such borrowers, leading to the revival of such businesses, enhancement of economic activities and contributing to the development of the national economy.

Q: What specific initiatives is the Central Bank undertaking to modernise the financial sector in Sri Lanka?

The CBSL is implementing numerous measures to modernise the financial sector of Sri Lanka, especially through improvements in regulatory framework in relation to payment and settlement system and the banking sector, promotion of digital transactions and strengthening of digital payment infrastructure. These measures are expected to help the domestic financial sector to keep up with the advancements in the global financial sector, while allowing the domestic consumers to reap the benefits of technological advancements.
The CBSL is currently in the process of revising the Payment and Settlement Systems Act, No. 28 of 2005 (PSSA), and it is planned to enact the new PSSA by 2025, with the aim of facilitating the rapid integration of payment innovations.

Additionally, we focus on revising regulations to strengthen the expansion of digital payments, aligning with the evolving needs of the digital economy. Furthermore, it is expected to revise the regulatory sandbox framework to encourage greater participation from FinTech firms, thus promoting innovation and competition within the sector.

To further strengthen the retail payment infrastructure, LankaPay (Pvt) Ltd (LPPL), under the guidance of CBSL, is in the process of developing the Government Digital Payment Platform (GDPP) through the LankaPay Online Payment Platform (LPOPP). This initiative aims to enable government entities to seamlessly collect payments digitally from the public, streamlining administrative processes and enhancing efficiency. The pilot phase of the project is currently underway, with selected banks and government institutions actively participating in its implementation.

One notable feature of the Central Bank Act is the designation of the CBSL as the Macroprudential Authority in Sri Lanka. Macroprudential approach is relatively new in central banks’ policy toolkit, which surfaced as an important aspect after lessons learned from the Global Financial Crisis. As the Macroprudential Authority, the CBSL plays a crucial role in safeguarding the stability of the financial system by identifying and mitigating systemic risks. The macroprudential approach also modernises and enhances systemic risk surveillance and mitigation process.

Q: How does the Central Bank plan to balance the adoption of new technologies, like blockchain and DLT, while ensuring stability and security in the financial system?

Banks are required to comply with the Banking Act Directions on “Regulatory Framework on Technology Risk Management and Resilience for Licensed Banks”, where CBSL has facilitated for the adoption of new technologies and the digital transformation of banking while being cautious on safety of their systems and databases.

The CBSL has been diligently studying the feasibility of adopting new technologies in the financial industry. In 2018, the CBSL commenced a comprehensive study of Blockchain and DLT together with the banking and IT industries. In 2019, the CBSL commenced the development of a proof of concept of a Blockchain Based Shared KYC facility for Sri Lanka. Through this project, we were able to determine that Blockchain technology can be effectively used for financial applications.

Q: What measures is the Central Bank taking to enhance financial inclusion and accessibility in Sri Lanka, particularly in rural areas?

The National Financial Inclusion Strategy (NFIS) is the foremost initiative led by the CBSL in collaboration with another 20 stakeholders to promote financial inclusion in the country. NFIS is a four-year strategy which is being implemented since March 2021. The Action Plan of the NFIS encompasses 80 broad actions spread over four key policy pillars, namely, (a) Digital Finance and Payments, (b) MSME Finance, (c) Consumer Protection, and (d) Financial Literacy and Capacity Building.

THE NATIONAL FINANCIAL INCLUSION STRATEGY (NFIS) IS THE FOREMOST INITIATIVE LED BY THE CBSL IN COLLABORATION WITH ANOTHER 20 STAKEHOLDERS TO PROMOTE FINANCIAL INCLUSION IN THE COUNTRY. NFIS IS A FOUR-YEAR STRATEGY WHICH IS BEING IMPLEMENTED SINCE MARCH 2021.

In order to promote Micro Small Medium Enterprises (MSME) finance, measures have been introduced to assist the formal financial sector to scale up MSME lending, for example through concessionary loan schemes and allowing lower risk weightages for SME lending through Banking Act Directions. In addition, cash-flow based lending and use of moveable collateral such as through the enactment of the secured transaction law and encouraged to boost MSME lending. Furthermore, the CBSL is also involved with capacity building of MSMEs through a targeted training programmes and in strengthening market-friendly policy approaches to increase MSME finance, especially through credit guarantee schemes.

The CBSL plays a pivotal role in promoting financial literacy and empowering individuals and MSMEs of the nation for them to make informed financial decisions, ultimately contributing to overall economic resilience and well-being. Various types of financial literacy programmes are conducted including media campaigns to educate the public on budgeting, investing, credit and debt, planning for savings and retirement, digital means of payments, navigating financial institutions and products and their rights and responsibilities in the financial landscape. Furthermore, several capacity building programmes and technical assistance are provided for the relevant stakeholders including the registered financial institutions.

Q: How does the Central Bank plan to address challenges related to cross-border transactions and international financial integration?

From regulatory point of view, close coordination and collaboration is maintained with certain regional Central Banks through signing of Memoranda of Understanding. Regarding cross border transactions and international financial integration, the CBSL has designated several foreign currencies to facilitate carrying out of foreign currency transactions of licensed banks. Expanding the number of designated foreign currencies, the CBSL recently determined Indian Rupee also as a designated foreign currency enabling expansion of economic activities between India and Sri Lanka, particularly by facilitating the trade transactions between the two countries, which could be favourable in importation of goods and services.

THE CBSL PLAYS A PIVOTAL ROLE IN PROMOTING FINANCIAL LITERACY AND EMPOWERING INDIVIDUALS AND MSMES OF THE NATION FOR THEM TO MAKE INFORMED FINANCIAL DECISIONS, ULTIMATELY CONTRIBUTING TO
OVERALL ECONOMIC RESILIENCE AND WELL-BEING.

The CBSL granted approval to LankaPay to join the Asia Payment Network in 2023. Further, the CBSL also granted approval to LankaPay to join with several regional and country payment networks authorised and regulated by the respective country or authority. Accordingly, LankaPay was granted approval to connect with UnionPay International Co., Ltd (UPI), National Payment Corporation of India International Payments Ltd (NIPL), and Nepal Clearing House Ltd (NCHL). Chinese tourists are able to conduct transactions through this since February 2023. Indian tourists visiting Sri Lanka are able to pay using LANKAQR, with effect from 12.02.2024.

One of the main challenges for the CBSL in promoting financial inclusion is to ensure that cross-border payment systems are accessible to individuals and businesses in underserved or remote areas. To meet this challenge, the CBSL launched the National Remittance Mobile Application, ‘Lanka Remit’, which enables Sri Lankans working abroad to send money to Sri Lanka and to pay utility bills using Electronic Fund Transfer Cards (credit and debit cards).

From Entrepreneurship to Central Banking: A Leader’s Journey

Embarking on a journey from managing his father’s business to becoming the Governor of the Central Bank of Sri Lanka,Dr Nandalal Weerasinghe shares pivotal moments that have shaped his approach to leadership and decision-making.

His story reflects how experiences as an entrepreneur laid the foundation for his journey in public service.

Amidst the backdrop of conflict and uncertainty in the late 1980s, Dr Weerasinghe transitioned to a career in banking, marking a pivotal moment that redirected his trajectory. Drawing from his rich experience, he offers insights into his leadership philosophy and the goals he has set for himself professionally.

In this article, we delve into Dr Weerasinghe’s journey, his strategic vision as Governor, and the advice he offers to aspiring leaders in economics and finance, encapsulating lessons learned from a distinguished career in the financial sector.

Q:Can you share a pivotal moment or experience from your professional journey that has shaped your approach to leadership and decision-making as the Governor of the Central Bank of Sri Lanka?

My approach to leadership and decision-making was cultivated through my engagement in managing my father’s business since my school days, prior to embarking on a formal career.

After completing my first degree in physical science in 1982, I continued to work with my father in running his business without applying for any formal public sector or private sector employment. However, in the late 1980s, there were disruptions in carrying out businesses due to emergence of conflict in the South. Due to an uncertain future as an entrepreneur,I looked for different career opportunities and as a result, I was able to join Central Bank as a Management Trainee in 1991. It was the pivotal moment which turned my career as a central banker. After joining the Bank I was able to develop my leadership and management skills further . However, I still greatly value my experience and exposure as an entrepreneur which shaped my approach to leadership and decision-making.

Q: What are some of the key goals you have set for yourself professionally, and how have you worked towards achieving them throughout your career, particularly in your current role as the Governor?

As an entrepreneur, I always focused on meeting short-term goals without thinking too much about what would happen next. For example, completing the project at hand successfully would make one’s ability to take on a bigger project next. As a professional central banker, I followed a similar philosophy by which I always tried to deliver the tasks assigned to me as best as possible within the objectives of the institution. Once the tasks were completed successfully better opportunities and career prospects would follow soon.
When I took over the position as the Governor,the economy was heading towards a crash landing. For example, my focus at the beginning was to prevent the crash landing using the mandate of the Central Bank.

There were a few short-term goals set;
a) Prevent the country going into hyperinflation
b) Control the sharply falling value of the Rupee
c) Make available foreign exchange at least for the economy to operate smoothly even with very low level of economic activity created by the crisis and
d) Initiate negotiations with the IMF for a bail-out package with sovereign debt restructuring. While making progress towards achieving such goals the next set of goals are being set with a vision in line with the mandate given to the Central Bank.

Q: As a seasoned leader in the financial sector, what advice would you offer to the next generation of aspiring leaders, particularly those interested in pursuing careers in economics or finance, based on your own experiences and lessons learned?

Anyone interested in pursuing economics and finance careers needs to face challenges in dealing with business cycles that can be volatile and uncertain. One should be able to maintain a calm, cool head in a challenging or uncertain environment. This requires not only having some technical capability, but also being able to contextualise, interpret and present ideas in a simple way through effective communication. One should be able to communicate technical concepts effectively to both a technical and non-technical audience.