degree of transparency and  Hence, countries, which were  accountability. dependent on monetary targeting  Inflation targeting is known to be  frameworks, have been moving away  operationally complex. It requires greater awareness of the whole  Central Bank of Sri Lanka – ROAD MAP 2017  12  monetary transmission mechanism  upgrade the technical capabilities of the  (MTM) and is based on a working link  Central Bank staff. from policy interest rates to interbank interest rates and to long-term interest rates. Under our enhanced monetary policy framework, we expect to predominantly employ market-based instruments, particularly policy interest rates and open market operations (OMO) to guide the average weighted call money rate (AWCMR), which is considered as the operating target, along the desired path. This would ensure effective transmission of monetary policy. With a view to strengthening its policy formulation and modelling capacity, the Central Bank of Sri Lanka has been obtaining technical assistance from the IMF in the area of macroeconomic forecasting, modelling and policy analysis. As such, a joint effort has been made by the Central Bank and the IMF in developing a structural model-based Forecasting and Policy Analysis System (FPAS) to strengthen the monetary policy decision making process and to support Sri Lanka’s transition to a  Within this enhanced framework, the  flexible inflation targeting regime. The  Central Bank does not set any monetary  FPAS is a medium-term, pre-emptive  targets explicitly.
The challenge that we are having right  The country has a number of structural  now is to put in place policies that give  problems that have been amplified over  us sustained stabilisation of  the years by the large fiscal and trade  macroeconomic fundamentals in the  deficits, which are the core weaknesses  country, amidst uncertain global  of the Sri Lankan economy. Being a twin  conditions. deficit country increases vulnerability in  It is important to recognise that stabilising the economy after decades of  an uncertain and volatile global economic environment. fundamentally unstable macroeconomic  Unsustainable budget deficits boost  policies cannot be achieved without  excess and untenable demand in the  discipline. This will inevitably result in  economy. When there is excess demand,  some pain in the short-term. However,  it leads to inflationary pressures and  there is every possibility that a more  higher nominal interest rates in the  promising future can be realised  economy and there is also a higher  through the policies and programmes  propensity to import, given the  that are already in the pipeline. For this  limitations in domestic supply. That in  to happen, consensus must be built  turn, exerts pressure on the balance of  among politicians, policy makers and  payments and the exchange rate.