W A Wijewardena: Auditing the key policy functions of a central bank – views from the top Keynote address by Mr W A Wijewardena, Deputy Governor of the Central Bank of Sri Lanka, at the Seminar on “Effective Internal Audit for Central Banks”, Windsor, UK, 30 April 2009. The views expressed in this paper are those of the author and should not be construed as those representing the Central Bank of Sri Lanka. *  *  *  The primary objective of a central bank is to stabilise the value of its currency and continue to maintain that stability to facilitate long term economic growth. There could be other ancillary objectives assigned to a central bank, such as providing liquidity to the government to bridge its revenue and expenditure flows or refinancing banks’ loans to priority sectors. But the primary objective of a central bank takes precedence over any such ancillary objective and, if there is a conflict between the two, a central bank should always give priority to its primary objective 1 . This is because the success or failure of a central bank is gauged by its attainment of the primary objective and not the ancillary objectives. Even if a central bank has done well in realising its ancillary objectives, but failed in the primary objective, then, that central bank is deemed to have failed in its operations.
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 continuous domestic inflation is a sign of a central bank’s failing to fulfil its primary obligation to the community. The new role of auditors of a central bank The central bank auditors, both internal and external, have for long confined themselves to the financial type of auditing of the operations of a central bank. The objective of this auditing is to identify whether a central bank has complied with the set-financial rules and procedures, whether there are irregularities or malpractices in payments or recording transactions or whether frauds have taken place in the operations of a central bank.