policy document that “ for medium to long - term price stability, the central bank will move towards a flexible inflation targeting regime. they will aim at continuously maintaining low inflation while supporting economic activity and competitiveness. the government will implement the legislative and operational changes necessary. ” while it is heartening to note that the central bank and the government have agreed in principle that flexible inflation targeting is the way forward in the conduct of monetary policy, the full implementation of flexible inflation targeting by the year 2020 will require increased efforts to fulfil the remaining prerequisites for the success of inflation targeting. it is also expected that comprehensive amendments will be made to the mla to facilitate the transition to flexible inflation targeting, to redefine monetary policy objectives, eliminate monetary financing of fiscal deficits, and ensure central bank autonomy and public accountability. amendments to the mla are also expected to streamline the monetary policy decision making process. within the central bank, the ongoing upgrade of technical forecasting and analytical capabilities will continue, and it is expected that by 2020, the central bank will commence the publication of comprehensive inflation reports. the inflation report will explain inflation developments, inflation expectations, projections for inflation and other key macroeconomic variables, the assumptions behind such projections, reasons for any deviation of actual inflation developments from targeted levels, and remedial actions to be taken in the case of deviations. such transparency and accountability is likely to enhance the credibility of the central bank and well anchor inflation expectations, resulting in increased economic stability and supporting high economic growth and increased international competitiveness of sri lanka. meanwhile continued commitment by the government towards greater fiscal discipline and stronger fiscal position remains key to the successful adoption of flexible inflation targeting. therefore, the central bank will continue to support government ’ s efforts to reduce the debt to gdp ratio to 70 per cent by 2020 and curtail budget deficits at 3. 5 per cent of gdp from 2020. the government ’ s intention to strengthen the fiscal management ( responsibility ) act is very encouraging in this regard. in conclusion, i would like to take you back to the beginning of central banking in sri lanka. in 1949, john exter, the founder of the central bank of sri lanka, in his “ report on the establishment of a central bank for ceylon ” stated as follows : “ the decision of the government of ceylon to establish a central bank was a decision with far reaching implications for the people of ceylon. one implication already stands out very clearly : in taking steps to establish an independent monetary system

sufficient time for deeper macroeconomic analysis. several other recent policy changes will also support the implementation of flexible inflation targeting in the medium - term. the central bank has implemented a more market based exchange rate policy during recent times, with limited intervention in the foreign exchange market. there has been a build - up of international reserves with minimal impact on the exchange rate. in tandem, the financial system has continued to expand whilst exhibiting resilience amidst challenging market conditions both globally and domestically. the implementation of the basel iii framework will further enhance the resilience of the financial system. a deeper and more liquid government securities market is also a prerequisite for a smoother transmission of the central bank policy rate signals to market interest rates, as yields on government securities form benchmark medium to long - term interest rates. in this regard, the recently introduced system of rule based and more transparent treasury bond auctions, has not only reduced sharp volatility in yields on government securities, but also corrected the distortion between central bank policy rates and market interest rates that existed earlier. this mechanism has also helped reduce monetisation of the fiscal deficit through purchasing treasury bills by the central bank at primary auctions. for example, the central bank holdings of treasury bills have declined drastically this year from more than rs 300 billion at end 2016 to around rs 30 billion by now, as the new system ensures full market subscription through the auction system without creating adverse volatility in interest rates. the proposed liability management act allows the treasury to create a buffer fund to meet the expenditure in the following year, eliminating the necessity for the central bank to provide advances to the treasury at the beginning of each year as per the current provisions of the mla. these two measures would, in future, insulate monetary policy from fiscal dominance. these reforms are expected to create a win - win situation for both the central bank and the treasury, as they would facilitate the treasury to raise the required funds at the least possible cost from a more sophisticated government securities market at competitive rates, while helping the central bank to achieve its primary objective of maintaining price stability. looking towards the future : flexible inflation targeting as the new monetary policy framework in the “ road map : monetary and financial sector policies for 2017 and beyond ” presented in january 2017, the central bank of sri lanka reiterated its intention to move to flexible inflation targeting in the medium - term as its new monetary policy framework. the government has endorsed this move since then, and stated in its recently released vision 2025