Turn on the news in Sri Lanka, and you will hear two things: “The President presented the Budget” and “The Central Bank increased interest rates.”

To the average person, these might sound like the same thing—”government stuff.” But as an A/L Economics student, you must know the difference. These are the two hands that steer the economy, but they are controlled by different people and use different tools.

Confusing these two in an essay is the fastest way to lose marks. Here is the non-mathematical, plain English guide to the difference between Fiscal and Monetary Policy.

1. Who is in Charge? (The Driver)

The biggest difference is who pulls the levers.

• Fiscal Policy: This is controlled by the Government (The Cabinet and Parliament). It is political. Decisions are made through the annual “Budget Speech” you see on TV.
• Monetary Policy: This is controlled by the Central Bank of Sri Lanka (CBSL). It is (supposed to be) independent. Decisions are made by the Monetary Board, usually to keep prices stable.

2. The Tools (The Weapons)

How do they actually change the economy?

• Fiscal Policy Tools:
  • Taxes: Increasing VAT or Income Tax to collect money (or cool down spending).
  • Government Spending: Building highways, paying teacher salaries, or giving subsidies (Samurdhi/Aswesuma).
• Monetary Policy Tools:
  • Interest Rates: Changing the Policy Rates (SDFR/SLFR) to make borrowing expensive or cheap.
  • Reserve Ratios (SRR): Telling commercial banks how much cash they must keep in the vault.

3. The Main Goal (The Destination)

Why do they do it?

• Fiscal Goal: usually focused on Growth and Distribution. The government wants to create jobs, reduce poverty, and build infrastructure.
• Monetary Goal: usually focused on Stability. The Central Bank’s main job is to stop inflation (price stability). They take away the “punch bowl” when the party gets too wild (inflation rises).

4. A Real-World Example in Sri Lanka

Let’s look at the recent crisis to make sense of this.

• The Fiscal Action: The Government increased the VAT rate to 18%. Why? To increase government revenue and fix the budget deficit.
• The Monetary Action: At the same time, the Central Bank kept interest rates high. Why? To stop people from borrowing too much money, which helps bring inflation down.

Summary Table

• Policy: Fiscal vs Monetary
• Controller: Government vs Central Bank
• Key Tool: Taxes/Spending vs Interest Rates
• Primary Aim: Growth/Public Services vs Price Stability

Don’t memorize definitions—understand the news. When you understand the why, the exam becomes easy.