“One way of trying to control interest was controlling treasury bonds by not having public auctions but by setting the rates secretly through private transactions. This is a violation of international transactions,” he says.
Giving an interview, he said criticism and allegations over the bond issue were leveled by only a section of the media and the opposition.
“The reason for this was the change. We had to make a significant change in the issuance of bonds. Bonds were issued during the period of 2010 to 2014. In the process of that change, certain parties were affected and I think they are behind this criticism,” he said.
Text of the interview:
Q: At a time the country is on the verge of conducting general election, one of the main topics being highlighted at the election meetings was the controversial bond issue of the Central Bank. Allegations were leveled against you as the Central Bank Governor for involving in the decision-making process with regard to the Bond issuance. But before we come into that question we would like to know about your contribution to the country as a top public official during your service in Sri Lanka.
A: first of all I would like to tell you is that I am a true Sri Lankan who served the country for many years in several important state institutions including the Board of Investment. As the BOI chief I have been able to promote and attract several significant investments to the country. One such investment project was the launching of very large out sourcing enterprises in the island. It was the first time that the country has ventured into out- sourcing business. It has created thousands of employment opportunities for youth while earning much needed foreign exchange for the country. During s my tenure at the BOI I had the opportunity to visit France along with Mass holdings head Mahesh Amaleen. We held talks with several investors in France. a leading lace manufacturer in France Mayong has agreed to set up a factory in Sri Lanka and it was the first branch of this company established outside France. Another significant investment was the super luxury residential complex at wellawatte spinning and weaving mill land. S.P Tao who built the World Trade Centre in Colombo was the investor.
Q: There were allegations against you that you are a Singapore citizen but not a Sri Lankan .How are you going to respond to it?
A: I am a true Sri Lankan. My father is C. Mahendran who served as a diplomat. He was graduated from the University of Peradeniya. My mother too was a graduate of the same university. Both of them spent their entire careers serving Sri Lanka and its people. Both of them are Sri Lankans. My elder daughter is married to a Sri Lankan and both of them are living in Sri Lanka. Her husband is working here in Sri Lanka it is in this backdropthat some people call me a foreigner. My son and wife are living in Singapore as the son is studying accountancy in that country. I was a citizen of Sri Lanka until 2006. The reason why I obtained citizenship from Singapore is very clear. I was the Chairman of BOI until 2004 and I had to resign from that position when the UNP Government changed. In a country like Sri Lanka, you cannot get a decent job after a political appointment of that nature. No one wants to hire you as you have worked for a Government that has been defeated. So I found a job in Singapore. It was not difficult for me to find a job in that country In Singapore, there is a policy that compels you to obtain citizenship from that country because I am an investment banker by profession. when you do a high profile job. So I had to obtain citizenship to protect my job. That doesn’t mean I love Singapore more than I love Sri Lanka. I received the citizenship in Singapore in 2006.Reently the media and the opposition had leveled several allegation against me branding as a LTTE sympathizer and non citizen of Sri Lanka. These two allegations were totally false. Although I have received citizenship from Singapore I am a true Sri Lankan. A person living in Singapore cannot maintain relations with terrorist organizations. Such things will deprive of your stay in that country and it is also illegal. After the political change in 2015 I have been asked to return to the country and I accepted the invitation with the aim of serving the island nation.
Q: Leaving a lucrative job in Singapore and taking up the job of Central Bank governor of Sri Lanka is question. Can you explain why?
A: I am a Sri Lankan you have to obey to your country’s call.
Q: Do you think you have enough expertise and exposure to accept the post of Central Bank governor?
A: yes of course. I am too humble to say that I have everything. But I think I have enough experience to handle this job. The job of the Central Bank Governor is to manage money, raise money and ensure that there is financial stability with inflation kept under control. With my work experience, I am capable of doing that .On the other hand employees of the Bank were very close to me as I have worked there for around eleven years. Two of the three Deputy Governors currently serving the Central Bank are my batch mates. I have been able to carry out duties at the bank in a proper manner due to assistance of my subordinates.
Q: Are you considering making any administrative changes along with your recent restructuring of Central Bank recently?
A: I noticed some important changes that had taken place in the Central Bank. It is a timely need. But the important thing was that such changes are bringing progress to the institution or not. The taking VER THE Regional development banks by the Finance Ministry from the Central Bank was a pragmatic decision during past period. The reason was that the handling of commercial bank operations was not under the purview of the Central Bank. Its task is to regulate banks but not to operate it. However certain changes and actions taken by the bank had affected the financial management of the Central bank. The maintaining of the Employees Provident fund has created some issues in the recent past. I would like to mention here about an investment of Rs. 5 billion made by EPF in Hyatt hotel complex in Colombo. This was high risk investment as it has been made out of money of private sector employees. Under this set up I took measures to set up a risk management department at the bank.
We had a legal and compliance department before. When I assumed duties it was non-existent. It is a basic function in any banking institution. The Central Bank did not have a legal department. The lawyers in the banks were transferred out to various other departments and lawyers were outsourced for legal requirements. Large sums of money were paid to them as legal fees some legal officers had been transferred to other sections. Some of them were not given any duty. I took measures to correct this. Legal and compliance department has now been reestablished. I also found out that training function had been merged with the human resources department. I thought it was not a wise move. The risk management function did not function independently in the Central Bank. That too was a discrepancy.
Q: What are the remedial measures that should be adopted by Sri Lanka in the face of the world economic crisis drop in oil prices and economic challenges in the region?
A: as you have very correctly pointed out the world economic growth is receding at present. Although the China’s economy is strong it is difficult to maintain continuously due its population control policies. Sri Lanka will have to face many challenges. The country’s elderly population and the number of elderly work force are also rising. The wages of workers were also not favorable level compared to other countries. Countries like India, Bangladesh and Vietnam have advantage due to cheap labour. Sri Lanka’s Apparel industry is under a threat under these circumstances. Sri Lanka’s tea market is also suffering set back due to sanctions imposed on Iran and crisis situation in Russia. Under this set up we should consider sort term measures to tackle this situation. We can gain short term benefits by improving tourism industry in the country.
Sri Lanka’s unspoiled beaches could be developed to make it tourist attractions. In addition it is essential to launch a programme to propagate attractive tourist destinations and establish tourism zones in the island.
Sri Lanka should invite their foreign expatriates to return to the country and make a living in their motherland. Around one million Sri Lankans are working abroad .We will be able to increase our foreign reserve by providing them with facilities for these Sri Lankans and settle in the country. We are planning to streamline the exchange control department of the Central Bank and ease legislations towards this end.
Q: You have been under criticism and serious accusations with regard to the controversial bond issue by certain media and the opposition. What is your response for your critics?
A: These criticism and allegations were leveling only a section of the media and the opposition. The reason for this was the change. We had to make a significant change in the issuance of bonds. Bonds were issued during the period of 2010 to 2014. In the process of that change, certain parties were affected and I think they are behind this criticism. Previous regime was keen on keeping many things under control and one part of that process was controlling interest rates. One way of trying to control interest was controlling treasury bonds by not having public auctions but by setting the rates secretly through private transactions. This is a violation of international transactions.
Firstly I would like to inform that I have been released from any charges by the three member Supreme Court bench headed by the Chief Justice. My name has already been cleared by the Supreme Court.
This Treasury bond issue has cropped up when the Finance Minister announced significant salary increases for public sector employees. It was clear that the government would need to raise significant amounts of money to fund that exercise.
Meanwhile, I found that within three weeks – in late January and early February – the Central Bank was unable to raise funds to meet the requirements of the Government by way of weekly issuance of Treasury Bills and Treasury Bonds in the Public Debt Department. On further inspection, I was made to understand that the methodology adopted by the Central Bank’s Public Debt Department to raise money through the issuance of Treasury Bonds differed from international conventions. Private placements in 2014 were several times the volume of issuance done by auctions in the same year. This practice flouted international conventions whereby private placements should not exceed 10-15 per cent of the total size of issuance on a particular Treasury Bond Issue.
The Monetary Board at its meeting held on February 23, decided to issue a 30-year Bond. We decided on a 30-year Bond was that 30 years was important to anchor the interest rates paid on the longest maturity at a time when it was anticipated that there would be a surge in Government borrowing.
Meanwhile, the Ministry of Finance had sent the Public Debt Department a communication that it requires a sum of Rs 13.5 billion.
On Thursday, February 26, we have found that the Public Debt Department had only been able to raise Rs 3.5 billion and therefore, the Department needed to raise a further Rs. 10 billion in one working day, Friday, February 27, before the due date of Monday, March 2.
The Public Debt Department following its usual practice, had placed an advertisement on the Central Bank website on Wednesday, February 25 indicating that bids should be accepted for an issue of a 30- year Treasury Bond, paying a coupon rate of 12.5 per cent. This advertisement was published in major national newspapers on February 26. Bids were to be accepted by 11.00 a.m. on February 27, Friday.
The Public Debt Department had advertised the size of Bond issuance at Rs 1 billion. This was because the Department was of the view that the Government may not be able to secure the full amount of Rs. 10 billion that was advertised.
The Public Debt Department officials informed they could find out as whether a large sums of money could be raised at the Treasury Bond auction that day.
Department officials informed that a total amount of Rs. 20 billion was offered by primary dealers at varying rates of interest. On perusal of the offered rates, it appeared that there was one bid at a rate of 9.35 per cent for just Rs. 8 million. However, there were several bids of much higher magnitude at a higher rate of interest with some bidders demanding as much as 18 per cent for subscription to this Bond issue.
Some primary dealers make such “dummy’ Bids when they are really not interested in participating in the auction. Primary dealers are required by the Central Bank to bid for at least 10 per cent of what is offered at each Treasury bill or Bond auction.
When perusing the list of Bids, it was discovered that the Central Bank could accept an amount of Rs 10 billion if it accepted Bids up to 12.5 per cent which was the interest rate published in the newspaper advertisements the particular day.
The Public Debt Department officials, who were present, claimed that they could raise Rs. 10 billion from the auction which would adequately meet the needs of the Finance Ministry’s funding requirements for Monday, March 2.
At a February 26, it was revealed that an additional amount of Rs. 15 billion was required to fund the re-commencement of highway construction activity which had come to a halt after the Presidential Election.
In addition, a further amount of Rs. 44 billion was needed, to pay for the land acquisitions, to enable the construction of these highways.
Despite these requirements being made known, it was decided to stop the size of the Bond auction at Rs 10 billion since raising higher amounts would entail the payment of high rates of interest exceeding the published interest rate in the advertisement.
There had been several instances of the Central Bank accepting amounts larger than those advertised at Treasury bill and Treasury bond auctions. The Tender Board therefore, accepted a larger amount than the advertised rate of Rs.1 billion in the 30- year Bond auction. Claims of financial losses are utter falsehood. This decision was made as per the order of the Finance Ministry. Had we not done this, the Finance Ministry would have run into a difficult position. The government coffers were empty when the new government was formed.
Q: Is your son-in-law a member of the senior management of that company?
No. When I became the Governor of the Central Bank, he resigned from that company. He stepped down from his position to allow me to discharge my duties without any conflict of interest.He informed the Public Debt Department of this decision. He did it voluntarily. In any well-run company, a member of the senior management would not get involved in any decision-making process of which his family members are stakeholders. I also follow the same procedure. That is what corporate governance is all about.
Q: Why this bond has been increased from Rs. 1 billion to Rs.10 billion.
A: If it is not done then the government will not get sufficient money to pay subsidies of tea and rubber small holders and settle bills of road and high way construction contractors. It will impact the country’s economy.
Q: Divergent views are being expressed on the country’s economic situation and the depreciation of the Rupee. Could you tell us your view on this matter as the Central bank Governor?
A: The country’s economy currently depends on foreign remittances of Sri Lankans working abroad. Last year we received US$ 7 billion in foreign remittances. But it may be more than thrice of that amount via unofficial channels. The maintaining of stable exchange rate was a wrong practice followed by the previous regime. Sri Lanka now maintains a flexible exchange rate. The Sri Lankan rupee had been depreciated by 2 percent when compared to other countries it is not much Japanese yen depreciated by 25 percent, and Euro by 25 percent. We need foreign exchange to stabilize our monetary situation. We should take prompt action towards this end.
Q: Have you made any attempt to influence the Tender Board?
A: I have not tried to make any influence over the Tender Board or the Public Debt Department.
I only sit Monetary Board meetings. I don’t sit at Tender Board meetings and I am not privy to any discussions that take place during Tender Board meetings. So, there is no way that I can influence their decisions.
Interviewed by - Sena Suriyapperuma