Former Public Debt Department Superintendent Dhammika Nanayakkara said that the maximum deviation between the amount of Treasury Bonds issued and the amount accepted during his tenure was below twice as the amount of Treasury Bonds issued. Nanayakkara, who was the Superintendent of Public Debt in 2014 and replaced by T.H.B. Sarachchandra in February 2015, revealed the information while providing answers to the questions raised at the Presidential Commission to Investigate the Bond Issue.
According to him, 17 bond issuances had taken place during the tenure of Nanayakkara out of which on seven occasions, the amount accepted was more than the amount issued.
The highest variance reported was Rs.1.3 billion, in which the amount issued was Rs.2 billion and the amount accepted was Rs.3.3 billion.
The reasons for the difference of amount offered and accepted was clear. As per Nanayakkara, the declining yield of the bonds and reducing borrowing cost of the government are the major reasons for deviations.
Looking at the T-bond auctions in 2015, it can be observed that the number of bond auctions had rapidly increased in 2015 and the government had borrowed more than Rs.550 billion through T-bonds.
This is a rapid increase. It was also observed that the Central Bank had gradually increased the number of long term bonds auctions. In 2015, there was one 30-year maturing period bond and five bonds which had a maturing period of more than 14 years. The argument is that long term bonds are not very beneficial to investor as the returns in the long run can be lower when inflation is taken into account. In that context, it can be argued that the government can benefit by issuing long term T-bonds. Rapid increases of borrowing through T-bonds indicate that the government tries to rely on domestic debt rather than foreign debt.
An interesting trend can be seen regarding the issuing of bonds. Almost every year, 30-year T bonds or 29-year maturing period T-bonds were issued. However, apart from the controversial bond issue in 2015, in all other instances the amount offered had no significant difference with the amount accepted although there were bids.
It can be further observed that the amount offered does not vary much with the amount accepted in bonds which has relatively less value. For example on February 26, 2013, the amount offered for five years and eight months and 10 years and seven months maturity period bonds were Rs.2 billion each and the amount accepted too was Rs.2 billion although there were bids in more than Rs. 4 billion. However, when the amount offered is higher there is a tendency to expand the gap between the amount offered and amount accepted.
Since the Yahapalana (good governance) government came into administration, no issue received attention as much as the controversy over the Treasury bond matter in February 2015.
Those in the Opposition claimed that there has been a massive financial fraud which incurred a loss in billions to the government and termed this as a ‘Bond Scam’.
Former Central Bank governor Arjun Mahendran who was accused of involvement in the fraud claimed that he is not guilty of anything that he was accused of. During an interview, he claimed that he was cleared by the Supreme Court. However, he was later removed from his position and the Committee of Public Enterprise (COPE) too conducted an inquiry regarding the matter. On top of that President Maithripala Sirisena appointed a special Commission to probe the issue for which the media too had access and the public was informed about the procedures.
The move to appoint a commission in that nature was a pivotal one made by the President. All the Central Bank officials were thoroughly questioned to make the complicated financial matters simple.
However, the issue with the financial fraud is that those are very complicated in nature. Due to the nature of the financialization, there could be numerous interpretation provided to the accused in financial frauds justifying the acts. The movie Inside Job, which depicted the financial crisis in 2009, shows that more often than not those who are accused of financial frauds are found not guilty due to the nature of financialization. The so-called bond scam could turn out to be one of those instances.
According to the Central Bank, these bonds were issued at a coupon rate of 12.5% with a 30 year maturity. However, the yield rate in the market on that day for a 30-year bond in the secondary market was 9.35% (net of tax) or a yield of 10.4% (with the tax). However, the Central Bank had taken initiatives to accept T-bonds at a higher yield rate. Accordingly, the Central Bank accepted T-bond bids at yield rates of 12.5% net of taxes, which worked out to a 13.9% yield rate including the tax. As a result of accepting bonds at a higher interest rate, critics argue that the government would end up paying a higher interest. According to Ajith Nivad Cabraal, former CB governor, the loss which was suffered by the government works out to a phenomenal sum of Rs. 291.6 million for every Rs. 1 billion.
However, the allegations were denied by Mahendran who further claimed that the Yahapalana government established a transparent mechanism in selling Treasury Bonds. According to him, during the tenure of the previous government, Treasury Bonds were issued through private placement in which case no one knows about the amount of bonds issued and the interest rates. This is completely transparent in auctions. Mahendran noted due to the issue regarding the confidence of the government in its economic situation, the Central Bank did not advertise bonds per Rs.10 billion and instead Rs.1 billion was advertised. Once the bids were called there were bids worth Rs.20 billion and according to Mahendran, it was decided to raise Rs. 10 billion since the government had requested more than Rs.10 billion from the Central Bank. In response to the interest rate increase, Mahendran claimed that the quoted interest rate was 12.5% and even after the amount raised was increased to Rs.10 billion, the weighted average interest rate was below 12.5%.
He also noted that the deviation between the amounts in bonds issued and accepted often differs according to the prevailing market conditions and the government requirements regarding the borrowings. This is evident looking at the data regarding amounts of bonds issued and accepted. However, it is a question whether such deviation was big as 10 times as the amount issued, which was the case in the controversial bond issue.
The matters in the financial world can be complicated and the particular bond issue is no exception. In that context, the appointment of a Presidential Commission to investigate the issue thoroughly was very important and a positive move.
Maybe we will have to wait quite awhile before the results can be announced, but what we all can hope for is that transparency would be upheld.