The former Governor of the Central Bank of Sri Lanka Ajith Nivard Cabraal last week spoke to The Nation Gain on subjects pertaining to the economy and shared his opinion on the recent controversy over the Treasury bond issue.
Excerpts of the interview follow.
Q: Since the position of a Central Bank Governor is deemed independent, why did you resign from your position on January 9 as soon as the new government took over?
I was responsible for the Central Bank and for the stability of the economy. I also had a degree of independence in conducting operations of the bank and also a good relationship with the government in order to implement the overall macroeconomic vision. In fact, I also had a hand in preparing that vision. So when the main focus of the government’s vision is changed, then I thought that it was best to provide the space for the new government to implement exactly the way they want. Had I stayed on, one, there would have been some element of suspicion whether we are following the exact procedures and the vision of the new government.
Or, there could have been some worry whether their plan was not being implemented the way they wanted. Another reason is that if something went wrong, they might have said that it was because of the governor. So in order to leave all that aside, I left on January 9.
Q: Do you acknowledge the fact that, the previous government had been fairly less successful in attracting potential foreign investments and also driving exports, especially after the end of the war?
You look at the last government’s track record with regard to investments. You would see, prior to 2005, we used to have an Foreign Direct Investments (FDI) of US$ 200 million at the maximum. When we finished in 2014, it was more than a billion dollars. So we got five times more. I don’t know how people can say that FDIs did not come.
Secondly, that was not the only type of investment we were looking for. The public investment program, which was a very heavy one, was extremely well received globally. Both those are good testimony of the macroeconomic plan we had.
If you look at the exports also, every year we had a fair increase. But there is a limit. This fallacy, is because people think that we are still a trading country, which we are not. We have imports and exports, plus services. During the last eight to ten years, our services have been increasing. We have had services such as IT, tourism, port services, and transport have been a massive contributors to the overall external accounts of the country. Even the monthly reports of the Central Bank do not talk only about imports and exports alone and has been talking about other activities as well. That shift in the macro picture has not been understood by those who come out with these allegations.
Q: A former Deputy Governor of the CBSL had recently described the continuous loss making position of the Central Bank to be an alarming trend. What is your point of view in this regard?
I think he is not referring to the reporting system adopted here as per to the Monetary Law Act (MLA). If you look at the Central Bank accounts, according to the MLA, the Central Bank has been making substantial profits while making contributions to the government as a dividend.
According to the IFRS, there are different ways to evaluate. The Central Bank is not merely an institution which is dependent on profits, because the bank can actually make profits if it wants. If the governor decides to depreciate the currency the entire foreign exchange reserve that the Central Bank holds will be valued at the new value and it can make a huge profit. Is that what you want?
So I think these are just distractions in the overall movement of the Central bank. Deputy Governors should particularly be conscious of the overall objective of the Central Bank. And I think the current Governor had responded to that very strongly and I tend to agree with the official position taken by the Governor.
Q: Why do all governments use a roll-over debt strategy to fund import driven consumption and not focus on fixing structural issues in the Balance of Payments such as driving exports?
You need to have your debt managed in such a way that will be gradually improve your Average Time To Maturity (ATM) and the total time that you have to pay for your debt to be reduced. In 2005, we had a debt stock where the average time to maturity was one year and nine months. When we left, it was close to seven years. the risk of the entire portfolio was reduced dramatically due to careful debt management and debt repositioning. That way we brought down the total pricing.
That was the cushion that this current government had. If they can preserve it, then very well. I think a strategy of rolling over is natural. Even large companies have huge debt stock which they roll. People are also happy to invest in those companies as they want to keep their monies in safe destinations.
Look at the 10 year bond in 2012. It attracted 450 investors and was oversubscribed ten times. When we asked for US$1 billion, they came in with US$10 billion. Look at the bond this time. They only managed to attract US$ 2 billion. And only 160 investors. What happened to the other 300 investors?
If you look at the bond we issued in 2007, during the height of the war, the then opposition leader went around the world saying they would not honor the bond. But we raised 500 million dollars despite these challenges. It is always easy to give excuses. But you have to deliver when you are at the hot seat.
Q: What was the state of the finances at the Central Bank when you left?
We had a reserve of 8.2 billion dollars and we had planned to issue a further bond in the middle of January 2015 of another US$1.5 billion. We postponed this issue of the bond because we felt that it was not appropriate to go to the markets in the midst of an election. We had indications that the response was very good and there many who were waiting for the bond to materialize. The secondary market rates were pretty low at that time in the range of about a little less than 5%.
Q: What is your analysis on the current state of the economy?
An economy has many factors and many components. Our idea at the time was to ensure that each of the components did well. I see presently some concerns particularly with regard to the overall investment focus in the country. In order to ensure proper economic movement, you need to ensure that there is always investment in the country. For investments to come in, you need to have the confidence, which is the key.
No investor would come in unless they are confident that the economy is moving well. There is political uncertainty, economic uncertainty, no new investments are coming in, projects have been stopped and people are worried. So all these are adding to the woes and are being reflected on some of the macro fundamentals. We are having low inflation but higher interest rates. In our case, we had a clear plan and people knew what we were doing and where the economy was heading. Today, if you ask anyone as to where the economy is heading, would they know? Whatever the reason, the economy must run.
Q: What is your opinion on the interim Budget presented by the new government?
It is a highly impractical budget and ill-advised. Those might be populist and might give some short-term points. But in the long term, if the investors run away then you have serious problem. This budget has done nothing to infuse confidence in the people. Local investors are dormant. I haven’t seen local companies coming out saying they would give jobs. We have heard many institutions that have said they have closed. Government has not been able to raise the necessary finances to fulfill the promises they had made to the people.
Q: There are allegations the previous government had resorted to borrow through state banks and hence the public debt figure had been distorted as it did not take into account of contingent liability. Your response?
If there is a government borrowing, then it is defined as Public Debt and it happens all over the world. Banks borrow every cent they are investing. Have you found banks that have not borrowed? When they take deposits from people that means they have borrowed. Banks will be owned by the government or shareholders. So if the banks are keen to take a risk where they are willing to borrow from outside and lend to the government, it doesn’t matter. Banks also loves to do their business. Tomorrow if a state bank says it would not do government business, the private banks would be very happy.
This is a fallacy again when people say when a government-owned bank lends money to a government institution, that it is a government borrowing. It is not so. These are commercial decisions. They have to evaluate the commercial viability of the loans they give.
Q: What is your opinion with regard to the Treasury bond issue?
I think much has been said about the way how it had been done. But I would like to explain the nexus of the different components of this issue. This was a scandal in my view of some massive proportion. It was not something that the Central Bank alone could have done. If the governor had worked with another company, which was, of course, connected to him, it still would not have been sufficient to do the deal as it was done because, there was a big component which also came from the Bank of Ceylon (BoC).
There were three huge coincidences that took place. One is where the Central Bank said that they will only take Rs.1 billion, it took Rs.10 billion. It was an extremely unusual occurrence. Two, the Primary Dealer involved in this bond issue makes bids totaling Rs.15 billion for an issue advertised for Rs.1 billion! That is Rs.2 billion through its own account and Rs.13 billion via BoC. Again, extremely unusual!
Three, the BoC, out of the blue, comes out and provides finances to a Primary Dealer to the tune of Rs.13 billion overnight. Four, the Central Bank has given guidance interest rate of 9.5% to all primary dealers. It’s a normal thing where they call and say they expect at this rate. Every bond issue they do that.
Q: But the Central Bank Governor insists they didn’t give any guidance and that the advertised coupon rate was 12.5%?
Coupon rate doesn’t matter. It is not considered when bidding and primary dealers only bid based on price guidance. So, the guidance rate for this auction was given at 9.5% because the secondary market rate was going at 8.8%. They thought the given percentage was ample for a bond at this stage. If you carefully look at the first few bids, they were all within that range. First bid was from BoC. Then suddenly you get bids for 12.5%! So, all these coincidences took place. That is why it is clear that this is not a one off action of one of the parties of this transaction. It was planned with some centralized approach.
And it was executed with the assistance of all these parties.
After the bond is issued, look at the intensity of the cover up. If you take The Finance-NSB deal which made headlines few years ago, when the transaction was evaluated, the former President was of the view that it was not totally above board. So he cancelled. People said that it was a transaction in Stock Exchange. But he still ordered the cancellation. It was then a mere Rs.130 million transaction. This is Rs.10 billion and the losses incurred are horrendous. No one has cancelled it. In fact, the losses are continuing and up to now, Rs.55 billion has been recorded since the February 27 auction.
Someone must do something to go back to the rates before that date. Everyone in the market knew that the inflation was going to come down at that time because the fuel prices and the energy prices were down. Therefore, they were not going to increase the interest rates. The Central Bank itself said they did not see a need to do so. Then what happened was a new percentage was established to 11.73%. The three-month bid went up from 5.98% to 6.89%. And we got a new yield curve for no reason. The curve had been coming down in previous years.
Q: Given that there is a published report by a 3-member committee report, the Bribery Commission has questioned the Governor, Immigration authorities have impounded his passport, a Fundamental Rights petition had been rejected in Supreme Court and the COPE is also now looking into it, what makes you think the government is trying to sweep the bond issue under the carpet?
This three-member Committee Report is an absolute bunkum. All this to me points out that there is a higher hand. Certainly, the defense of the Governor has not come from the Governor himself. Those days when somebody said something against the Central Bank, we defended. Here, there is another arm which is defending. In fact, I was one of the people who went to COPE voluntarily and provided my statement. They have attempted very hard to sweep it under the carpet. The media has been the key in dealing with it.
Even in the Fundamental Rights petition filed by Dr. Geedreck Usvattearatchi, Dr Alagu Caruppiah Visvalingam and Chandra Jayaratne, the questions asked were designed in such a way that they won’t be allowed leave to proceed! If you take a case of this nature, if you go to Supreme Court and if you are a hostile party, and if you want justice, what will you ask for? That it will be investigated properly and the culprit brought to book, the money to be restored and this loss to be stopped.
That is the normal thing. But look at the FR petition. The petitioners’ main request to the Supreme Court is, Declare that the , Governor Central Bank, Chairman, Treasury Bond Tender Committee and Superintendent and Registrar of Public Debt have not discharged their duties in a manner that is necessary for the preservation of public trust; Direct the Monetary Board to carry out an independent inquiry by a competent panel of professionals well versed in the rules, systems, procedures and processes applicable to the public debt management under the supervision of the Court and to report thereon to Court; and direct any one or more of the 1st to 5th Respondents in consultation with stakeholders, to formulate new systems, processes, rules and regulatory frameworks which assure transparency and best good governance practices are in place in respect of future public debt issuance, pursuant to the independent inquiry sought in prayer above;
So it is clear that even the petitioners are part of the whole cover up!
Look at who filed actions. Chandra Jayaratne, Visuvalingam and one of the lawyers from Mr. Weliamuna’s chambers. So they deliberately filed the petition as soon as possible so that others may lose the opportunity to file petitions if leave was not granted for this one. That is why I am saying these are well planned because stakes are high. It can have massive implications.
The Supreme Court has only rejected to grant leave for the petition on the basis of the petitioners’ requests and not anything else. However, the real issue here is, insider dealing. The Supreme Court has done the right thing. It has been carefully planned in such a way to frame the questions to get acquitted.
Look at Section 113 of the MLA, which states that the Central Bank is the agent of the Government. The objective of the Public Debt Department (PDD) is to raise government finance at the lowest possible cost.
Q: If for example you were still the Governor, and the government needed your department to raise urgent financing, how would you have handled it?
Well, if this happened during the previous regime where I was the Governor and Treasury Secretary was Dr. P.B. Jayasundara, and if the government needed urgent financing, first thing, the Secretary to the Treasury would have requested the BoC to issue an overdraft. If the O/D limit at BoC had been exceeded, he would have then sent a letter to the Central Bank requesting to issue a Treasury Bill for Rs.10 billion. You don’t have to borrow for 30 years.
Who would take a 30 year loan with an additional 3% interest for Rs.10 billion? This was only to pay a contractor, but we managed money during the time of war where there were more serious urgencies. Yet we handled it.
Q: Amidst the confusion in the terminologies, direct placement and private placement, that methodology adopted in your regime to raise money is being heavily criticized citing that it is not a transparent system. Kindly explain in detail as to how the process took place?
‘Private placement’ is a term coined by the three-member committee report, where they have mentioned it within brackets for ‘direct placements’. However, there is no terminology like that. The term is ‘direct placement’ and how that takes place is this:
Let’s say for example, that there Rs.5 billion bond issue and you tell the primary dealers that the price guidance is 9%. Let’s say we receive bids amounting to Rs.3 billion at a weighted average rate of 9% and the balance Rs.2 billion at 12.5%.
If you’re sitting on the Tender Committee, and being consistent of the guidelines of the Central Bank, will you accept the full Rs. 5 billion or stop at Rs. 3 billion? If you are intelligent, you would stop at Rs.3 billion. Then you tell the market again that we have another Rs.2 billion to issue and the price is 9.1% which is the price that was established by the most recent auction. So to raise the balance Rs.2 billion at the established price, now you ask the primary dealers to decide on the amount of bonds they would like to buy. Then, this is not bidding for the price, but for the amount. This is the standard practice used in many countries and Sri Lanka has not used this only during my time, but previously too.
On the other hand, coupon rate is meaningless because the bidders will only bid based on the price guidance. The price guidance is recorded. Even in the 30 year controversial bond, the first few bids, apart from those by Perpetual Treasuries, were based on price guidance and hence low as 9.5%. I was shocked when he (Arjuna Mahendran) mentioned on TV about the coupon rate being the price guidance. Does he not know this as a Governor?
Coming back to private placements, at the end of the day this is the time they put this canard. I think that was deliberately done to shift the focus and that is why I am saying that it is a cleverly planned report and it was not amateurish. That’s the intrigue. The cover up is of the same magnitude of the Water Gate scandal in the US. Cover up with the lawyer report, with the FR, with the private placement, with the Prime Minister’s statements in Parliament, and covering up the loss by getting people to write about it.
Why do you think there is all this cover up? Is it to protect Arjuna Mahendran? No. I don’t think so.
Q: The incumbent governor says according to the guidelines on Public Debt, there is a 10% maximum limit on what can be raised through Direct Placement. Firstly, is there such a rule and if so were there instances where the CBSL under your tenure had violated those regulations?
There is no limit like that. The guidelines do not say so. If I had violated during my tenure, it would have easily come into the limelight. The Auditor General might have issued a statement, COPE would have inquired into it and so on.
There are guidelines for the public debt management because this is the biggest department handing money for the country. It has to be managed properly.
Q: With regard to the recent US$ 650m Sovereign bond issue, Deputy Minister Eran Wickremaratne in Parliament had said that the issue was not successful only because you had personally tried to sabotage it by telephoning book runners and investors in US and discouraging them to not subscribe for it?
If I am that influential, I would be very honored. If I can persuade 453 investors who came in 2012 to 160, I must be someone. So I would like to first thank Minister Eran Wickremaratne for giving me that honor. But I don’t deserve it.
Secondly, I have not done this. Do they want me to do what they did in 2007 by campaigning against the bond issue under my governorship? They want me to do this because they have this themselves. Even I persuaded them I wouldn’t have been successful in bringing down the number of investors to this low level.
Thirdly, I want to tell them that they have only themselves to blame with the uncertainty in the economy at the moment.
Pic by Ravindra Dharmathilake