Rebuilding Sri Lanka’s monetary and financial system

A national prescription for stability, growth and economic renewal

By Ravi Karunanayake

Introduction: A nation at an economic crossroads
Sri Lanka today finds itself at one of the most critical economic crossroads since Independence. Over the past several years, the country has endured sovereign default, rapid currency depreciation, inflationary shocks, weakening purchasing power, declining investment, collapsing business confidence and severe financial hardship for ordinary citizens, businesses and productive enterprises alike.
While these crises are often discussed as separate economic events, the truth is far deeper and more concerning. They reflect long-standing structural weaknesses within Sri Lanka’s monetary, financial and economic governance architecture itself.
The time has therefore come for a serious and honest national discussion on whether the present central banking and financial regulatory framework is adequately designed to guide Sri Lanka toward long-term stability, sustainable growth and national economic resilience.
This is not a discussion about personalities. Nor is it an attempt to undermine institutional independence. It is a discussion about correcting structural deficiencies, strengthening accountability, modernising governance and ensuring that monetary policy ultimately serves the broader national interest.
A credible monetary system requires a professionally independent central banking framework insulated from short-term political pressures, arbitrary interference and external vested interests. However, independence in a democratic economy must operate alongside transparency, accountability, responsibility and measurable institutional performance.
At the same time, it must also be acknowledged that Sri Lanka’s past experience has demonstrated instances where undue political influence, external pressure and interference from powerful interests may have adversely affected professional judgement, regulatory objectivity and long-term economic decision-making.

The need for balanced institutional reform
Accordingly, the objective of this proposal is not to weaken professional independence or politicise monetary policy. Rather, it is to establish a balanced framework that simultaneously:

• protects professional and technical decision-making from improper political influence;
• strengthens transparency and accountability;
• promotes hands-on practical and proven professional competence within monetary and financial governance;
• prevents excessive concentration of unchecked institutional power;
• ensures proper segregation of regulatory responsibilities;
• strengthens implementation capability and institutional responsiveness;
• and aligns monetary governance with Sri Lanka’s long-term growth, investment and development priorities.
  Sri Lanka must avoid two dangerous extremes:

1. political interference without professionalism, competence and practical expertise; and
2. institutional independence without accountability, urgency, responsiveness and measurable performance.
   A modern monetary and financial governance system must therefore be built upon professionalism, technical competence, operational independence, institutional accountability and measurable national outcomes working together — not in conflict with one another.
   Institutional weaknesses exposed by the economic crisis
   Sri Lanka’s recent economic experience has exposed several deeply concerning institutional weaknesses:

• delayed regulatory intervention;
• weak supervisory follow-up;
• excessive concentration of authority;
• insufficient accountability to Parliament;
• lack of implementation culture;
• poor coordination between monetary policy and national growth objectives;
• perceptions of a laissez-faire or delayed regulatory response by supervisory authorities, with insufficient urgency and responsibility extended during periods of emerging financial stress;
• weak integration between financial governance and long-term national development priorities;
• and an overreliance on contractionary economic management at the expense of production, investment and employment.
  A country cannot continuously suppress credit, weaken enterprise, discourage productive investment and contract economic activity while simultaneously expecting sustainable prosperity to emerge.
  Price stability is important. Fiscal discipline is imperative. Reserve management is indispensable. However, stability without growth eventually becomes stagnation.
  Sri Lanka therefore requires a broader and more balanced economic philosophy — one that protects monetary stability while simultaneously encouraging production, exports, investment, entrepreneurship, industrial expansion, technological advancement and employment generation.
  The country must move away from a purely anti-inflationary contraction model and transition toward a supply-side-led national growth strategy.
  Inflation caused by shortages, low productivity and weak domestic supply cannot be solved solely through restrictive monetary contraction and high interest rates. Long-term stability comes from expanding productive capacity, increasing exports, strengthening logistics, improving energy security, enhancing technological capability and building national competitiveness.

A new monetary and financial framework for growth
Sri Lanka must therefore adopt a monetary and financial framework that supports:

• economic growth;
• productive investment;
• export competitiveness;
• SMME sustainability;
• employment creation;
• long-term reserve accumulation;
• digital transformation;
• technological modernisation;
• and sustainable national development.
  It is within this context that Sri Lanka should seriously consider restructuring and modernising its existing monetary and financial governance architecture.
  A strong case exists for transforming the current structure into three specialised and accountable institutions.

1. Monetary Authority of Sri Lanka
   The first would be a Monetary Authority of Sri Lanka responsible for:

• monetary stability;
• exchange-rate management;
• reserve management;
• payment systems;
• sovereign liquidity;
• digital financial infrastructure;
• fintech integration;
• financial-system resilience;
• and macroeconomic stability.
  However, unlike the narrow frameworks often adopted in developing economies, the mandate of this institution must extend beyond inflation targeting alone. It must also legally support:
• economic growth;
• employment;
• exports;
• investment promotion;
• digital economic expansion;
• industrial competitiveness;
• and SME development.
  Monetary policy cannot function in isolation from the productive economy. A healthy monetary system must ultimately strengthen national production, innovation, productivity and competitiveness — not weaken them.

1. Prudential Regulation Authority
   Secondly, Sri Lanka urgently requires a dedicated Prudential Regulation Authority focused exclusively on:

• banking supervision;
• finance-company oversight;
• capital adequacy;
• liquidity monitoring;
• fraud prevention;
• depositor protection;
• cybersecurity resilience within financial institutions;
• stress testing;
• digital financial risk management;
• AI-driven supervisory applications and modern regulatory technology;
• crisis-management coordination;
• and early-warning intervention systems.
  Recent developments within the financial sector have demonstrated the serious risks associated with delayed supervision, weak follow-up and reactive regulation. Financial-sector oversight must become proactive, technologically competent, operationally independent and capable of responding to rapidly evolving digital financial risks.

1. Financial Conduct Authority
   Thirdly, the country should establish an independent Financial Conduct Authority responsible for:

• consumer protection;
• market conduct;
• payment-system integrity;
• disclosure obligations;
• debenture-market supervision;
• rating agency accountability;
• audit quality;
• data governance standards;
• fintech consumer safeguards;
• ethical market practices;
• and financial-sector integrity.
  Public confidence in the financial system depends not only on balance-sheet strength, but also on transparency, fairness, technological security and institutional credibility.
  Such a specialised structure would reduce the concentration of excessive authority within a single institution while improving accountability, efficiency, professionalism and regulatory effectiveness.

Repositioning Sri Lanka toward investment-led growth
At the same time, Sri Lanka must urgently reposition its broader economic priorities toward investment-led growth and productive expansion.
For too long, the country has remained trapped in an economic cycle heavily dependent on recurrent expenditure, debt-funded consumption and short-term stabilisation policies. Sustainable national recovery cannot emerge from contraction alone. It must come from expanding productive capacity, encouraging investment and improving national productivity.
Government policy must therefore prioritise:

• domestic investment;
• foreign direct investment;
• manufacturing;
• tourism;
• technology;
• logistics;
• renewable energy;
• agricultural modernisation and high-technology agricultural adaptation;
• export industries;
• maritime services;
• digital industries;
• value-added production;
• and industrial development.
  Sri Lanka’s future cannot depend solely on taxation and austerity. It must depend on production, competitiveness, innovation and economic expansion.

Digitisation as a national economic transformation strategy
Sri Lanka must also recognise that the future global economy will increasingly be driven by digital transformation, technological innovation and data-based economic activity. No modern economy can achieve competitiveness, efficiency and investment growth without embracing digitisation across both the public and private sectors.
Accordingly, national economic policy must prioritise:

• digital payments and financial inclusion;
• fintech innovation and regulatory modernisation;
• secure digital banking infrastructure;
• AI-driven productivity and public administration reforms;
• SMME digitisation and e-commerce expansion;
• cybersecurity and digital resilience;
• digital identity and integrated e-governance systems;
• export-oriented IT and knowledge industries;
• blockchain and emerging financial technologies under proper regulation;
• digital education and technological skills development;
• and the development of Sri Lanka as a trusted regional digital and financial services hub.
  Digitisation must not merely become a technology project. It must become a national economic transformation strategy capable of reducing inefficiency, expanding formalisation, improving tax administration, lowering transaction costs, increasing transparency and attracting high-value investment.
  A strong digital economy can also become a major source of foreign exchange earnings, export diversification, productivity enhancement and long-term reserve accumulation.
  At the same time, the rapid expansion of digital finance and interconnected systems also requires strong safeguards relating to cybersecurity, consumer protection, data governance and financial-system integrity. Economic modernisation without digital security can expose the country to significant systemic risk.
  Sri Lanka therefore requires a balanced digital-economic framework that encourages innovation while protecting national financial stability, institutional credibility and public confidence.

National investment and supply-side growth council
The country should also establish a National Investment and Supply-Side Growth Council comprising:

• the Government;
• the Monetary Authority;
• investment agencies;
• exporters;
• banks;
• SMEM representatives;
• digital-economy stakeholders;
• technology-sector representatives;
• academia and research institutions;
• and private-sector stakeholders.
  Its responsibility should be to identify bottlenecks, fast-track investment approvals, monitor national productivity targets and ensure policy coordination between monetary management, technological modernisation and economic growth objectives.
  The objective must be to create an economy that rewards:
• entrepreneurship;
• production;
• exports;
• innovation;
• digital transformation;
• technological advancement;
• productivity;
• competitiveness;
• and long-term investment.

From discussion to execution
Sri Lanka must also address one of its most damaging institutional weaknesses — the culture of excessive discussion with inadequate execution.
For decades, the country has produced:

• reports;
• committees;
• policy papers;
• frameworks;
• and presentations.
  Yet implementation, follow-up and accountability have remained weak.
  Modern economic governance requires measurable outcomes. Institutions must ultimately be judged by:
• jobs created;
• reserves strengthened;
• investments attracted;
• exports expanded;
• businesses sustained;
• digital competitiveness improved;
• investor confidence strengthened;
• and public confidence restored.
  Parliamentary accountability and democratic oversight
  This is why stronger parliamentary accountability is essential.
  Monetary and financial institutions must be required to:
• report quarterly to Parliament;
• disclose reserve positions transparently;
• reveal foreign exchange exposures and liabilities;
• answer parliamentary questions within statutory timelines;
• undergo independent audits;
• maintain strong cybersecurity and digital-governance standards;
• and face forensic reviews following major regulatory failures.
  Independence must never become immunity.
  No institution in a democratic nation can function as a state within a state.

Developing policies based on Sri Lanka’s realities
Sri Lanka must also become more confident in developing economic policies suited to its own realities. While international expertise and global engagement remain valuable, policy frameworks must ultimately serve Sri Lanka’s national interest and developmental priorities.
Successful economies such as Singapore, Malaysia, India, Vietnam and several Gulf economies succeeded not because they blindly copied foreign prescriptions, but because they adapted global best practices to local realities while prioritising national growth, investment, technological advancement and competitiveness.

Sri Lanka’s untapped strengths
Sri Lanka possesses enormous untapped strengths:

• a strategic geographic location;
• strong maritime potential;
• educated human capital and a globally respected, friendly nation;
• entrepreneurial capability;
• tourism advantages;
• agricultural capacity;
• growing digital potential;
• and access to major global markets.
  What has been lacking is not opportunity, but institutional coherence, long-term direction, accountability, execution capability and confidence.

Conclusion: A choice between decline and renewal
The objective of reform must therefore be clear: not institutional destruction, but institutional modernisation for national recovery and national development.
Sri Lanka requires a monetary and financial governance system that is:

• professionally independent;
• nationally accountable;
• growth-oriented;
• investment-friendly;
• technologically modern;
• transparent;
• digitally resilient;
• development-focused;
• and capable of balancing stability with economic expansion.
  The future of Sri Lanka cannot be built on contraction alone. It must be built on:
• confidence;
• production;
• investment;
• exports;
• innovation;
• digital transformation;
• accountability;
• hard work;
• discipline;
• and strong institutions.
  If we act decisively, responsibly and with national vision, Sri Lanka can still transform itself into a resilient, competitive and prosperous economy in Asia.
  The choice before us is simple: continue managing decline through short-term controls, or build a modern economic architecture capable of creating long-term national progress.
  Sri Lanka possesses the talent, geographic advantage, entrepreneurial capability and human potential required to succeed in an increasingly competitive global economy. What is required now is not merely policy reform, but national commitment, institutional discipline, professional competence and the collective determination to build a stronger future for generations to come.
  Ultimately, the development of a nation is not a question of whether it can be achieved. It is a question of whether we are prepared to work hard, act responsibly, remain disciplined and stay committed enough to achieve it.
  (Ravi Karunanayake FCMA, CMA is a member of parliament)

Disclaimer: The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official position of this publication.