Cabraal defends Central Bank tenure, welcomes PSC over actions

Former Central Bank Governor Ajith Nivard Cabraal

Former Central Bank Governor Ajith Nivard Cabraal issued a statement on 23 May over what he terms as the “recent accusations and innuendo” cast on his tenure as the head of the financial body. The following is his full statement.  

My attention is drawn to several recent accusations and innuendo by certain persons, including the Prime Minister, alleging various wrongdoings and misdemeanours on my part, during the period I served as the Governor of the Central Bank.  

I believe the main reason for such outrageous, unsubstantiated and reckless statements is that those who are making such statements are desperately attempting to shift the country’s attention away from the current burning issue of the Treasury Bond scam which is now causing losses to the economy and the country in epic proportions. 

At the outset, I wish to a state that I have held the office of the Governor of the Central Bank for a period of around 3,100 days and during that period Sri Lanka’s GDP, which was just over $ 24 billion in 2005, had been carefully nurtured to grow to a robust $ 75 billion by 2014, with the per capita income rising to about $ 3,700. 

Furthermore, every macro-economic fundamental of our country had been improved significantly. Unfortunately, because of this unprecedented transformation, there have been some politically-motivated persons who have been adversely affected. Therefore some of them have been on a hate-driven, revengeful attack against me in order to tarnish my reputation and it is clear that these hurtful attacks are now escalating, in view of the present Governor’s conduct coming under close scrutiny.

 

False misappropriation allegations

One such recent attack is the shockingly false statement as reported in various media, that Rs. 2,700 billion has been “misappropriated” in the years 2012, 2013 and 2014 through private Treasury Bond auctions which have allegedly been conducted by Tender Boards chaired by me. 

It is also claimed that I have authorised these “illegal” transactions, for the benefit of various “cronies”. I categorically reject such preposterous allegations, and must also state that it defies all logic and common sense to claim that the entirety of the Treasury Bond issues made by the Government from 2012 to 2014 are to be construed as “losses”, on the erroneous assumption of the Prime Minister that a part of such issues have been through “private placements”. 

I also observe that an attempt has been made to twist the concept of Direct Placements to Primary Dealers after conducting an auction, as a sinister and/or secretive process, and to suggest that such placements were personally handled by me to grant favours to selected persons. 

In this regard, I had initially decided to ignore these wild and false allegations but since these are now being levelled with gay abandon, obviously to cover-up the major controversy of 27 February 2015 Treasury Bond issue, I believe it is now necessary to provide a response. As a start, it may be useful to set out a short response to the Prime Minister’s statement made in Parliament on 17 March 2015, regarding the controversial bond issue 27 February 2015. 

In that statement, he first raised the issue of “private placements” being done by the Central Bank, with the innuendo that it is a corrupt practice. In that context, it must be stated that in many developed and emerging economies, the practice of Treasury Bill and Bond auctions and follow-up with direct issuance of bonds to investors, is being followed. 

In Sri Lanka too, such practice has been followed for several decades to reduce the borrowing cost to the issuer, i.e. the Government. The benefit is derived since the determination of yields of such direct placements have always been on the basis of the lower of the latest primary market weighted average yield rate, and the prevailing secondary market yield rates. Hence, it is a practice that is transparent, since the yield rate is established through a bidding process, and is known to all. 

Although the Prime Minister failed to maintain this fact his statement, it must also be said that it is not possible to misguide the Treasury Bills and Bonds market, in such circumstances, as all this information is available to all market players. 

In fact, such fact was discovered by the current administration during the recent controversy which erupted no sooner than the 30-year T-bond of 27 February 2015 was announced because the market quickly picked up the irregular nature of the transaction, which was beneficial only to a handful number of people.

In the Prime Minister’s statement, he had also stated as follows: “In just one instance in 2013, Rs. 16 billion worth of five-year bonds were sold through auction at a yield of 10.9% and thereafter Rs.76 billion of the same bond were sold through private placements at a higher yield of 11.42%”. However, the facts in this connection as may be noted from the publicly available data are as follows:

(a)     As per the auction results published in the Central Bank Press Release dated 10.01.2013, the Rs.16 billion 5-year T-bond issuance referred to above was for a 5 years and 3 months tenure, and was made at a yield of 10.90%. 

(b)     Thereafter, a FURTHER primary auction of T-bonds was held on 27.03.2013 for the same tenure, i.e. 5 years and 3 months for a different bond series, and the primary auction yield rate at that auction was 11.45%. That auction results were published in the Central Bank Press release dated 27.03.2013. 

(c)     The direct placements done subsequent to the T-bond auction held on 27.03.2013 were at a lower yield of 11.42% which was lower than the primary auction yield rate of 11.45%  referred to in (b) above. 

 

Prime Minister’s erroneous statement

Hence, the practice as followed by the Central Bank which has been existing for a considerable period of time had resulted in lowering the borrowing cost to the Government, unlike in the case of the 27 February 2015 Treasury Bond, where the Government had to incur a huge additional cost.

In that background, it is clear that the Prime Ministe rhad misdirected himself, which led to him making an erroneous statement in Parliament. 

In contrast however, the background of the 30-year bond transaction of 27 February 2015 is different as summarised below: 

In the Prime Minister’s statement, he has been quick to compare the above yield rate of 11.73% of the 30-year bond issued, with the yield rate of 11.75% of the 30 year bond issue made in June 2014. However, he conveniently ignores any reference to the most vital factor which is the substantial reduction in market yield rates after June 2014 in the case of the 30-year T-bonds, leading to the rate being only 8.85% just prior the 30 year bond auction held on 27 February 2015. 

In fact, there have been several direct placements made during the period from June 2014 to 27 February 2015, at gradually reducing yields in accordance with the principles and practices followed in making direct placements, with the latest such direct placement having been made at 8.85%  just weeks before the 27 February 2015 auction. 

Hence, the Prime Minister’s statement seems to be cleverly formulated to conceal the true loss to the Government, which was the payment of nearly 2.98% more, on the basis of weighted average yields, thus requiring the Government to pay billions of rupees extra in the form of interest costs, over the next several years. 

The Prime Minister’s statement also referred to several previous instances of the Central Bank accepting much higher volumes of bids than what were advertised. He makes particular reference to the Treasury Bill issue on 14 February 2014, where Rs. 1 billion worth of Treasury Bills were offered, and over Rs. 11 billion were eventually sold. 

Reference is also made to the Treasury Bill issue on 14 November 2014, where Rs. 2 billion worth of Treasury Bills were offered, and over Rs. 13.5 billion were sold. In this connection, it is useful to examine the details of such issuances, which are summarised below:   

As can be seen, the above amounts were accepted at the same or lower yield rates, and not at higher yield rates, as has happened in the instance of the 27 February 2015 Treasury Bond auction, which the Prime Minister seems to be very keen to justify as being without blemish. 

Another reason to accept a higher quantum at that time may have probably been to avoid a significant decline in the yield rates, which would have disturbed the smooth functioning of the government securities market. 

The above observations are made by me from publicly available data, but the Public Debt Department should be able to clarify these matters further, it they are requested to do so. At the same time, may I also state that I have not yet been able to study the Report of the Lawyers appointed by the Prime Minister that was tabled in Parliament a few days ago, and hence I am unable to comment on its contents. However, I would be able to do so after I have had the opportunity to review same, in a few days’ time. 

It must also be stated that the proper and smooth functioning of the government securities market is very important to an economy since it sets the benchmark, risk-free yield rates for all other markets. In fact, it sets the guidance for the pricing of the entire range of financial instruments, from the over-night bank deposit rates to 10-year prime corporate debt rates to even 20 year housing loan facilities to ordinary citizens!

 

Law-abiding Central Bank

Accordingly, if the risk-free, benchmark yield curve is artificially corrupted or manipulated, or does not reflect the underlying macro fundamentals including low inflation, it will create a huge asymmetry in the functioning of the financial market. There will also be a crowding-out effect in the government budget financing while the loanable funds available for the private sector would be drained. 

In such circumstances, the private sector, which is expected to make at least an annual investment of around 25% of the GDP to secure an annual real GDP growth of around 7.0%, would not be able to do so. Such a situation would eventually lead to a negative impact on employment and other macroeconomic variables as well.

Let me also state that during my period in office,  I have ensured that the Central Bank diligently followed the laws of the country and the rules and regulations established by the Monetary Board, and have at all times, acted in the national interest of Sri Lanka and defended the integrity and wellbeing of our economy to the maximum. Notwithstanding such efforts, during my term of office, several political and other elements instituted legal actions against me and the Central Bank on various issues, in the Supreme Court of Sri Lanka, including the Ceylon Petroleum Corporation’s oil hedging transactions, EPF’s investments in the Stock Market and the Central Bank’s investments in Greek Bonds. 

In all these actions, the Supreme Court did not cite a single instance which even remotely suggested that I have done any wrong. Further, during my term of office at the Central Bank, well laid-out and documented procedures were followed in an environment of high quality internal controls, including due process and proper authorisation. I am therefore confident that in all policy advice activities, payments and investments, the applicable authorisations and procedures have been properly adhered to. The Central Bank’s actions have also been reviewed by the Central Bank’s own Internal Audit function and Compliance Mechanism, as well as by the Auditor General and the Central Bank’s IFRS Auditors, Ernst and Young. In addition, Parliamentary oversight has been exercised by way of the Committee on Public Enterprises (COPE) examinations and Committee on Public Accounts (COPA) reviews. 

The IMF has also conducted its own Safeguard Missions to assess the integrity of the Central Bank systems and operations during my period in office. I am proud to say that through all such stringent reviews, there has not been a single instance of misconduct or wrongdoing that has been cited by any of those authorities during the long period of 3,100 days, in relation to my conduct. 

I can also boldly and confidently state, that in my professional career that spans 33 years in the private sector and nine years in the public sector, my superiors, peers, colleagues and staff who have worked with me, know about my capacity for hard and diligent work, and the high standards of integrity, impartiality, good governance and professionalism that I have followed.  

In addition, the multi-lateral financial institutions, including the IMF, WB and the ADB, the large number of international investors who have so far invested over $ 6 billion in Sri Lankan financial instruments, and the global investment banks who have had extensive dealings with the Government and the Central Bank over the past eight years, will also confirm the highest standards of integrity, transparency and good governance that had been followed during my stewardship at the Central Bank. 

 

Parliamentary Select Committee

Notwithstanding the above, in the light of the new allegations made by the Prime Minister and certain others in government, I would be happy if Parliament, as the pillar of Government which is responsible for the public finances of our country, were to immediately establish a Parliamentary Select Committee to independently review the work done during my tenure of office of around 3,100 days as Governor. If that is done, I would also welcome the opportunity to provide details of the massive savings that have been effected in the Central Bank, the economy and the country, during my term of office. 

In a similar manner, I would like to invite the new Governor and those who are making these regular allegations against me, to also boldly subject themselves to a similar review of the first 100 days of their stewardship, particularly by way of an investigation by a Parliamentary Select Committee, into the 30-year Treasury Bond issue of 27 February 2015, and its devastating aftermath, as well as to examinations by COPE, COPA, and IMF Safeguard Assessment Teams without any delay and without obstructing the Opposition’s efforts to implement such a process. 

Since of late, there has been a growing feeling in the country that the Prime Minister has been desperately attempting to justify the processes surrounding the Treasury bond issue of 27 February 2015, although he has been quick to pursue with vigour, even the slightest suggestion of wrongdoing of the previous regime. Perhaps, he may be not pursuing the bond controversy because he has convinced himself that no rules have been violated, or that no loss has occurred.  

However, in actual fact, several rules and practices laid down by the Monetary Board seem to have been breached in the case of the 27 February 2015 bond issue, while the losses arising as a consequence of this issue are mounting daily to astronomical levels, with the additional interest cost to the Government now said to be exceeding Rs. 47,000 million as per knowledgeable analysts. 

Hence, in the interests of our economy, it is vital that the Prime Minister understands the true position, and therefore, I would be happy to clarify all these matters as well as provide any responses to the Prime Minister at a public television debate in Sinhala or English, on any date and channel that he may choose.