That goal now seems to be within reach, thanks in no small way to the Government’s steadfast commitment to fiscal consolidation. The achievement of a political consensus on the euro is also a welcome development. The main remaining challenge is to meet the inflation criterion. Tonight I shall argue that the euro is a necessary, but not a sufficient condition for faster growth. More specifically, unless we establish limits on how much we consume and, within limits set by the economy’s earning capacity, allocate a greater proportion of the national income to investment, the advantages of euro area membership cannot be fully realized. It is time for the country to disown an unfortunate legacy of its colonial past that is best reflected in the notion that it is possible to spend more without first producing more. To this day, political discourse contains frequent references to tax reductions and subsidies, when it should be rallying popular support for the need to strengthen the country’s capacity to generate wealth on a sustainable basis. The benefits of euro area membership As I have said, the adoption of the euro should enhance the economy’s potential to grow faster. The elimination of exchange rate risk and currency conversion costs should result in increased trade, while the lower interest rate and inflation environment of the euro area should make for reduced business costs and greater macroeconomic stability. Combined with the fiscal discipline associated with monetary union, this is expected to translate into higher credit ratings and better investment prospects.
Many critiques had pointed out, and the technical staff in the Bank had experienced, that the Bank could not succeed in its main task of taming inflation and bringing about price stability, if it was saddled with other tasks that would go against its main objective. Hence, there emerged a general consensus that the central bank should do only what it can do effectively and not otherwise. That consensus required the Central Bank to pursue a single objective, viz., the attainment of price stability. Following this consensus that emerged through the consultative process involved in the modernization, the technical staff of the Bank proposed an amendment to the Monetary Law by mandating the Bank with the task of attaining two core objectives. They were the attainment of both “price stability” and “financial system stability”. When the draft law was submitted to the then Governor, Mr. A. S Jayawardena, for clearance, he had changed the “price stability” to “economic and price stability”. The puzzled and bewildered technical staff flocked into his room seeking a clarification, since it was not in line with the accepted international trend. The writer recalls that even the Resident Representative of the IMF too was puzzled by this seemingly inappropriate mandate being added to the Bank’s objectives. But, Mr. Jayawardena, assuming his usual erudite and serious posture, offered a different explanation which had never occur red to the technical staff.