Within that limitation, the Exter Report has highlighted that “the greatest significance of the introduction of a Central Bank lies in the power of the bank consciously to influence the supply, availability and cost of money in Ceylon”. While this conscious action constitutes monetary policy, it differs from what a currency board does and even from a central bank’s creation of money through similar action by foreign exchange operations. Foreign exchange operations are compulsory and a central bank has no choice in that. When commercial banks offer foreign exchange to the central bank, it has to buy that exchange and issue local currency. But, a central bank’s credit creation through domestic operations is discretionary and voluntary. So, a central bank is in a position to regulate such money creation depending on the situation and the credit requirements of the economy. Hence, Exter did not expect the new central bank to have an open policy of creating money to finance the domestic operations. He wanted such operations to be conducted at the sole discretion of the bank. Exter also empowered the central bank to examine and supervise commercial banks in order to strengthen the banking system. Such powers would prevent banks from engaging in unsound practices, protect the depositors against bank failures and, with “lender of last resort” facility, provide liquidity in times of crises. Up to the establishment of the central bank, there was no any attempt at regulating commercial banks in Sri Lanka.

*  *  *  BIS Review 47/1998  -8-  GDP growth 1980-1997 Index: 1980=100, seasonally adjusted  135  135 Trend: 1993-97  130  130  125  125 Trend: 1985-90  120  120  115  115  110  110  105  105  100  100  95  95 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 Sources: Ecowin and the Riksbank  Budgetbalance: Sweden and EU-average Per cent of GDP, 1998-1999 forecast by NI and OECD  8 6 4 2 0 -2 -4 -6 -8 -10 -12 -14  8 6 4 2 0 -2 -4 -6 -8 -10 -12 -14  Sweden EU-average  90  91  92  93  94  95  96  97  98  99  Sources: OECD and National institute of Economic Research (NI)  BIS Review 47/1998  -9-  Wage curve: Sweden and EU area Wage/employee, annual percentage change, 1998-1999 forecast by OECD  14  14  12  12  Sweden  10  10  8  8  6  6 EU- area  4  4  2  2  0  0 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99  Source: OECD  Inflationexpectations of labour market organisations Per cent 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5  Jan-95 Feb-96 Nov-97 Feb-98  94  95  96  97  98  99  May-98  00  01  4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5  02 03  Sources: Statistics Sweden and Prospera Research AB  BIS Review 47/1998  - 10 -  Market and administered price components of the CPI Annual percentage change  5.0  5.0  4.0  4.0  Administered prices  3.0  3.0 CPI  2.0  2.0  1.0  1.0 Market prices  0.0  0.0 95  96  97  98  -1.0  -1.0 Sources: Statistics Sweden and the Riksbank  Krona exchange rate with US dollar and German mark 8.5 8.3 8.1 7.9 7.7 7.5 7.3 7.1 6.9 6.7 6.5 jan-95  5.6 SEK/USD (left scale)  5.4 5.2  SEK/DEM (right scale)  5.0 4.8 4.6 4.4 4.2 4.0  jul-95  jan-96  jul-96  jan-97  jul-97  jan-98 Source: The Riksbank  BIS Review 47/1998  - 11 -  CPI and underlying rates of inflation Percentage 12-month change  12  12 CPI  10  10 8  8 UNDINH  6  6 UND1  4  4  2  2  0  0 90  91  92  93  94  95  96  97  98  Sources: Statistics Sweden and The Riksbanken  Average of CPI forecasts of external observers Annual change, per cent  2.5  2.5 Forecast for 1999  2.0  2.0  Forecast for 1998  1.5  1.5  1.0  1.0  0.5  0.5  Outcome for 1997  0.0 Aug-97  0.0 Oct-97  Dec-97  Feb-98  Apr-98  Jun-98  Note.