free from that grip! to escape, a radical change in policies and perspectives was needed, and sri lanka responded by introducing several bold policy initiatives across several fronts : excessive monetary expansion was contained through unconventional monetary policies such as tight quantitative tightening ; recurrent fiscal expenditure was curtailed while preserving public investment for infrastructure development ; monetary and fiscal policies were - coordinated to bring about overall macroeconomic stability ; new foreign investment was targeted through a steady pipeline of major projects and investments in government bonds. these new measures led to an average annual growth of 7. 5 % over the four years, 2010 to 2013 and thus, the vicious cycle was converted into a new virtuous cycle, with inflation in single digits, shrinking debt to gdp ratios, and low interest rates. in 2009, sri lanka also faced another major challenge : the threat to its external account. the effect of global financial crisis had impacted sri lanka, and large scale overseas bond redemptions had resulted. it was soon clear that some external support was required to stave off this challenge, and sri lanka decided to avail itself of the imf facilities via a stand - by arrangement ( sba ). the key bis central bankers ’ speeches objective of the sba was for sri lanka to build up its foreign reserves to more comfortable levels to meet the uncertain global environment. the issue however was that the imf, in its conventional wisdom, was insisting that sri lanka sharply depreciates its currency in order to curb its trade and current account deficits which, in their view, would help the country to build up reserves. the imf also held the view that sri lanka must significantly increase government revenue by raising taxes. in theory and normal circumstances, imf ’ s suggestions may have had merit. however, the sri lankan authorities who had a deep practical understanding of the socio - economic challenges facing sri lanka, held a different view. the authorities ’ view was that since the conflict had ended, there was an urgent need to reconstruct the terror - affected areas, which covered almost one third of the country ’ s land mass, and two thirds of its coastal belt. new economic activities had to be promoted for the peace dividend to be realized. such new activities would necessitate a high import expenditure, which in turn, would create new capacity for economic growth. in such circumstances, if the sri lankan rupee were to depreciate i sharply, it would lead to a significant reduction in the imports necessary for reconstruction and a slow -

authorities. since sight money created is payable by banks at any time through legal tender and technically, the banking system does not have funds adequate for meeting all such created money at any particular point of time. banking business thus casts a huge responsibility on the monetary authorities to facilitate, regulate, and protect the banking and payments system. weak corporate governance ( cg ) can contribute to financial instability and that would increase the risk profile of companies in the corporate sector and expose the banks and financial institutions to a greater risk. in a more direct sense, weaknesses in cg arrangements in banks and financial institutions reduce their capacity to identify, monitor and manage their business risk and that can result in poor quality lending and excessive risk - taking by the financial institutions. depending on the resilience of the financial institutions and markets, these risks have the potential to spread across the wider financial system. needless to say that inadequate cg can also lead to a poor credit culture, excessive exposure concentration, poor management of interest risk / exchange risk and inadequacies in the management of connected exposures. some of these risks, singularly or collectively, can lead to potential insolvency and financial instability. in more recent times, the regulators world over have introduced prudential norms on single borrower exposures, group exposures and concentration of credit risks. the underlying principles of such norms indicate some degree of compulsion on the observance of cg principles. to further augment such prudential norms, regulators may even consider introducing mandatory disclosures by banks and financial institutions. where does good governance fit in this scenario? obviously, corporate governance is now identified and acknowledged as a powerful tool to generate trust and confidence in an institution. in that context, good corporate governance is essentially important for banks, because such institutions ( a ) deal with funds raised from the public ; ( b ) are likely to encounter greater risks including frauds and failure ; and ( c ) if such frauds or failures occur in such institutions, it may pose issues relating to public confidence in the financial system stability itself. all these reasons have led to banks tending to depend upon risk management practices based on principles of prudence rather than complying with only minimum requirements. it is also as a result of such realization that many stakeholders and regulators are now consciously looking towards good corporate governance, as one of the prime instruments in its overall effort to maintain financial system stability. in sri lanka, the cbsl has already issued a voluntary code of best