their free will, having assessed the risk and the profitability of the transaction involved. but, central banks could acquire assets just by making book entries. they could issue currency and get others to part with their assets in exchange for that currency. all that happens in a central bank ’ s balance sheet is the creation of a liability item in the form of “ currency liability ” and an asset item representing the asset the bank has acquired. this would make both assets and liabilities to rise simultaneously. this extraordinary power is being enjoyed by a central bank due its functioning as the monetary authority of a country. however, the community has given such a power to a central bank with a non - violable obligation attached to that power : the responsible use of the discretionary power vested with it. there are two reasons why a central bank should use its discretionary power of issuing currency responsibly. this is valid even when the financial system stability has been made either a core objective or an ancillary objective of a central bank. first, the issue of currency over and above the needs of the society will expand the nominal aggregate demand creating an excess demand for goods and services. since the aggregate supply is inflexible to meet this demand in the short run, the excess demand will put pressure for prices to rise. if this continues year after year, it generates inflation, reducing the wealth of people in real terms and creating a series of adverse consequences that hinder the long term growth. second, in an open economy which most countries have today, the rise in the aggregate demand could partly be met out of imports. unless the country makes a surplus in its current account, the payment for imports has to be made either through capital inflows ( both debt capital and non - debt capital ) or running down the existing foreign reserves. both generate long term balance of payments problems and exert pressure on the exchange rate to depreciate. thus, the irresponsible use of the discretionary power of a central bank to acquire assets by creating a currency liability will lead to a depreciation of both the domestic value of its currency ( domestic inflation ) and the external value of its currency ( continuous depreciation of the exchange rate ). however, the fall in the external value of the currency is linked to, and preceded by, a fall in the domestic value. in other words, depreciating exchange rates are an effect and not the cause of domestic inflation. hence, the

as much as the private sector but we do give security of tenure, you all get epf and pensions – these sort of long - term prospects will attract good people to this institution on continued basis. i have tried in my own way to fight with the government to get increases in wages for all of us and also reinstating the pension and i hope that will make it much more attractive for people to work for this institution and keep you from moving away into the private sector. but in the process we also have to develop our skill sets and really organize and prepare ourselves for the challenges of the future. the future i think is going to look very different from the past in this country. we are now reaching a level of normalcy which most of us have never experienced in our lifetimes. the year i joined this institution, 1983, was when the problem of the ethnic issue started, unfortunately. and it raged on for almost thirty years. so i do not think any of us have really experienced that normalcy and as a result, people are not really prepared to take on the challenges of what a normal market economy looks like. hence, it is really incumbent to us, to define for the country, for the government, for the people. and to propagate that message bis central bankers ’ speeches we have to be much more forceful in - terms of using the media, whether it is the newspapers, the television or social media, to bring forward views on what we think the future of sri lanka will look like. obviously in consultation with the government, we have people, as i said, in various institutions of government who can coordinate with us to come up with a comprehensive message, and using our annual report and other publications, we can continue to project that report, that view, that map of the future and engage with the government on how that will be achieved, all the while stressing the need for financial stability, the control of inflation and for seeing that economic development takes place in an optimal manner. that i think is really the challenge for us. we have to imagine what the future is going to look like. and at the moment i think this is the best institution to do so. so the challenges are ahead of us. it is not easy to change mindsets. remember, that a lot of people in this country, particularly those who work for the government have been used to a war situation. for most of their working lives, they have been living in a war economy