Sri Lanka, India and Iran have completed their Stage I payment reforms. Pakistan is in the process of completing Stage I, while the other SAARC countries are now taking steps to modernize their payment systems. The maintenance of a safe, sound and efficient payment system is a responsibility of the central bank as many of our central banks have increased focus on wider financial system stability as one of their core objectives. In that context, central banks are called upon to coordinate payment initiatives at national, regional and global levels to ensure that there are appropriate mechanisms for smooth payment flows. 2. Why payment systems are critical to regional development? Payment services are highly integrated and interdependent systems comprising payers, payees, payment instruments, financial intermediaries, markets, service providers, technical infrastructure, legal and regulatory systems and organizational structures. The public policy objectives common to all stakeholders are to enhance public confidence, safety, integrity, access to finance and efficiency of payment systems. Therefore, we need to facilitate cross border trade and investment flows through appropriate payment instruments, clearing mechanisms and settlement systems. In a globalized and highly integrated world, financial sector development is closely associated with cross border flows, including foreign direct investment which is critical to developing economies. Most of us in the SAARC region are FDI recipients.
The Central Bank has pointed out how the small amount of outstanding Treasury bonds in the market hinders policy rate changes from being transmitted with the necessary weight. Price formation in the bond market is imperfect. The Bank has aired the idea that the Treasury should issue bonds with the explicit purpose of maintaining an active bond market. Of course, such a suggestion must be qualified by the fact that the Treasury is on the verge of eliminating its net debt and has no need to borrow. The Central Bank’s standpoint, however, is that given the significance of domestic capital markets, the importance of facilitating the impact of monetary policy measures and long-term strategies for Treasury funding, it is in the Treasury’s interest to maintain a smooth bond market, even though it has no direct funding requirement. One example of Treasury issuance on such principles is Norway, which has had even less need to borrow than the Icelandic government. Claims have been heard that the Central Bank’s monetary policy is either impotent or wrong, and that the Icelandic króna is the root of macroeconomic instability. The Central Bank has pointed out that one consequence of globalisation and Iceland’s integration with global capital markets, coupled with the exceptionally intense upswing experienced in recent years, has been that the transmission mechanism of monetary policy has altered. In this climate, the impact is transmitted with greater force to the exchange rate, and only later to domestic demand, as I mentioned earlier.