Monetary policy strategy in 2007 and beyond  Monetary policy is the mechanism that is used by central banks all over the world to direct an economy along a non-inflationary, growth path. Such policy would ideally be supported by a series of other policies and strategies as well. The policy framework adopted by the Central Bank of Sri Lanka is a monetary targeting framework with reserve money as the operational target and broad money (M2b) as the intermediate target 1 . Such targets are carefully computed and set after taking into consideration, the potential growth and after assessing the liquidity needs of the economy to move along the projected growth path while keeping inflationary pressures in check. The veracity and accuracy of the values derived from the computation of the demand for money and the value of the money multiplier 2 are important prerequisites for effective monetary targeting. In that context, it is important to note that in Sri Lanka, there is a stable relationship between the operational target, i.e., reserve money, and the intermediate target, i.e., broad money, with the money multiplier consistently remaining around 5 during the recent past. The long-term relationship of monetary aggregates and inflation also indicates that money would be a useful leading indicator for inflation. Hence, we believe that monetary targeting could continue to be an effective framework for Sri Lanka in the short to medium term. In 2001, Sri Lanka moved to a “Floating exchange rate” regime thereby allowing market forces to largely determine the exchange rate.
We have sought to push in the direction of market forces, rather than against them. Asset management One good illustration of how we have sought to promote and develop our financial centre is our efforts to develop Singapore into an asset management hub. We assessed very early on was that there was good potential for growing the asset management industry in Singapore. A rising affluent class across Asia would have assets needing to be managed. Most of the savings in Asian countries are still in the form of bank deposits. There is considerable scope for diverting some of these funds for professional management. There was also an opportunity for managing the Asian mandates of global portfolio investors, an area where no clear leader had emerged. We believe that global funds and institutions would find Singapore a good location from which to manage their Asian portfolios. Although for now the region is not a hot destination for inbound investments, this will change as the region picks up again. We therefore carried out a comprehensive strategy to strengthen our fund management industry. We streamlined licensing requirements for fund mangers, and provided more room for indigenous fund managers to grow. We introduced tax incentives, especially for fund managers managing substantial amounts of discretionary funds out of Singapore. We leveraged on our domestic savings, both government and private, to attract fund managers here.