Key elements of a market-based financial system will require restoring confidence by correcting current imbalances and reducing the vulnerability of the financial system to further shocks, former Acting Governor of the Reserve Bank of New Zealand Prof. Grant Spencer said.
In addition Prof. Spencer said other key elements would be to remove short-term emergency restrictions once the confidence is restored and to implement Financial and economic reforms to improve long- term economic performance of Sri Lanka.
Prof. Spencer made these observations speaking at a special lecture on “Key Elements of a Market-based Financial System” yesterday (01) at the Central Bank of Sri Lanka Auditorium. Speaking on restoring confidence, Prof. Spencer said it is necessary to put public sector finances on a sustainable footing whilst restructuring the external debt, Committing to an independent Central Bank and improving the resilience of the banking system. Explaining further Prof. Spencer said in order to put public sector finances on a sustainable footing, it is required to reform the tax base, particularly for direct income taxes, thereby simplifying the tax rules by removing exemptions.
“Moreover, it is important to stop subsidies and cheap loans to favoured sectors, restrict growth in government spending with targeted assistance to the most needy and set clear and achievable fiscal objectives.”
On the external debt restructuring front, he said international creditors must agree to a haircut and lengthened debt maturities whilst clearing the way for the IMF porgramme with money going to current uses rather than repayment of existing loans.
Furthermore Prof. Spencer highlighted the need to commit to an independent accountable Central Bank. To this end, he said it is essential to pass the new Central Bank Act which will help to ensure price and financial stability over the long- term.
“An Independent CBSL with Government agency functions removed, will help to ensure that public finances remain in balance.”
Given the current economic scenario, Spencer pointed out the need to prepare the banking system thereby making detailed assessments of risk in the banking sector.
To this end, Prof. Spencer said it is essential for all banks to undertake stress tests.
“It is essential for vulnerable banks to bolster their balance sheets potentially through mergers and the Central Bank needs to prepare contingency plans for potential banking sector stress.
Prof. Spencer said further that correcting the fiscal imbalance, stabilizing the external debt, creating an independent CBSL and ensuring resilience of the banking system will help to restore international and domestic confidence in Sri Lanka’s future.
“It is important to reduce the risk premium in Sri Lanka’s interest rates and exchange rate, encourage a recovery of remittances and return of capital into the country and encourage the re-opening of capital markets,” Prof. Spencer added.
