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CBSL Governor Arjuna Mahendran Pic by Chandana Wijesinghe

Responding to the recent letter sent by the Former Governor of the Central Bank of Sri Lanka (CBSL), Ajith Nivard Cabraal to the Governor of the Central Bank Arjuna Mahendran, the latter, whilst urging the former to desist from attacking the Central Bank in the public media, highlighted several aspects of the deviations from past management practices that have taken place in the last decade.

Below, we publish the response by Mahendran in full for the benefit of our readers.

7th August, 2015
The Editor

Dear Sir,

The former Governor of the Central Bank of Sri Lanka has copied to you a letter addressed to me. In that letter, the former Governor regrettably seeks to cast aspersions at the Central Bank of Sri Lanka and myself.

As you are aware, the former Governor of the Central Bank has described himself in the social media as a politician and it is indeed a pity that he has chosen to politicize the activities of the Central Bank by constantly hogging the media spotlight trying to portray his governorship in a favourable light. Unfortunately, the opposite seems to be the case.

I need not reveal confidential documentation from the Central Bank archives in order to display the deviations from past management practices that have taken place in the last decade in this hallowed institution. It is to the credit of the long-suffering staff of the Central Bank of Sri Lanka, several of whom were my colleagues’ way back in the 1980s and 90s when I last worked at this institution, that they have preserved the sacred values that have come to symbolize this institution which is celebrating its 65th year of existence in 2015.

I highlight below some aspects of the deviations I have observed in the management of this institution which are already in the public domain which your readership may care to be reminded of:

  • The Central Bank of Sri Lanka was integrally involved in the decision bythe Ceylon Petroleum Corporation to hedge its purchase price for crude oil at a very high cost to the country, without sufficiently stressing the risks involved. The country has had to pay out several tens of millions of dollars in compensation to the international banks who constructed such hedging devices for the Ceylon Petroleum Corporation;
  • The investment policy manual governing the investment of the international reserves of the Central Bank was contravened to invest monies in sub-investment grade bonds issued by the Government of Greece that resulted in several tens of millions of US dollars of losses to the Government;
  • Several unconventional investments of EPF funds in projects such as the Hyatt Hotel project, for which the staff of the Central Bank offered qualified support, incurred losses for the EPF;
  • Substantial investments of the Central Bank’s international reserves into Gold at a very high price has resulted in substantial mark-to-market losses for the Central Bank running into several tens of billions of rupees for the Central Bank in 2013 and 2014;
  • The EPF and other Government financial institutions invested in the shares of several privately owned commercial banks, thereby creating a conflict of interest for the Central Bank which, as the regulator, is expected to turn a blind eye with respect to its ownership in these banking institutions;
  • Closure of the Legal Department and the Training Department of the Central Bank diminished the Central Bank’s capacity to deal effectively with legal issues and stultified development of the necessary skill sets that are needed for the institution to perform its objectives effectively;
  • Staff employed by the Central Bank participated in the activities of a private company which was formed by the previous Government to make a futile and enormously expensive bid to host the Commonwealth Games in Sri Lanka in 2018. These staff were forced to make expenditures that contravened the financial regulations of the Ministry of Finance and were sent on futile voyages overseas, on duty leave, in large numbers, to fulfill a project that by common consent was doomed from the inception;
  • As a consequence of all the aforesaid distractions to the Central Bank from its core focus of maintaining financial and monetary stability and curbing inflation, precious little in-depth economic research has been conducted by the institution in the last decade;
  • Extremely unorthodox and silly monetary policy measures deviating from standard international practice were resorted to such as the 2-tier repurchase rate offered to commercial banks. This resulted in a complete disruption of the structure of interest rates in economy;
  • On the basis of the artificially depressed interest rates created in 2014, opposition politicians have now sought to discredit me by imagining losses to the Government in the sale of Government treasury bonds. This assertion is to say the least, ludicrous. Such calculations could be disproved by an O’ Level student of accounting since they ignore fundamental aspects such as the time value of money and the artificial nature of the interest rate structure in late 2014 when making such computations. This in itself is a reflection of the weak intellectual culture fostered in the Central Bank in the previous decade;
  • The Organization for Economic Cooperation and Development (OECD) downgraded Sri Lanka’s credit rating from 5 to 6 on a scale of 1 – 7. This resulted in commercial lenders to the Government of Sri Lanka applying a10 percent upfront insurance premium against defaults on the Government’s commercial borrowings. Moreover, in 2012, a major international rating agency reduced Sri Lanka’s rating outlook from positive to stable reflecting the fact that the country had over-borrowed in commercial markets.

I am constrained to reveal the above facts for your readership to get a perspective on the serious issues created for the Central Bank which have to be set right immediately. As I said before, it is a testimony in the resilience of the institution and the staff who run it that the Central Bank of Sri Lanka is managing to right itself and restore normal procedures and practices and a sense of professionalism that was given short shrift under the previous management.

I would exhort the former Governor to desist from attacking the Central Bank in the public media to serve his own narrow political ends and try to emulate previous Governors who maintained their dignity and independence in public life by choosing to pursue interests which have contributed to enhancing the stature of the Central Bank of Sri Lanka.

Yours faithfully,
Arjuna Mahendran
Governor
Central Bank of Sri Lanka