Whose sins are we to expiate?

“The sin was his, and he must expiate it; it was I and my children who were the innocent sufferers.”

Cabral’s latest expression of his concern on ‘Forex Borrowings & Rupee Depreciation’ in the Daily FT of 24/10/2018 takes our mind and thoughts back to his heyday of carnivals and carousals.

His point of view that Forex Borrowings directly and indirectly hinder the economy and contribute to the rupee depreciation has to be considered more carefully. There are several underlying factors. The purpose and the productivity of Forex Borrowings is an important factor to consider leading to the question “Why do we have to do it?”

Decisions to borrow are taken for various reasons and under varied circumstances. All such instances are not equally pleasant and popular. Sometimes doctors take decisions to amputate. Certainly a decision disliked by any. But in order to avoid more damage and deterioration such decisions have to be taken. Like bad eating habits lead to serious health hazards, certain past acts and measures result in serious consequences.

There have been times when those at the helm of affairs of controlling the country’s economy, engaged in window dressings and methodologies invented by them to dubiously cover up the true positions. Such moves have caused devastating impacts and resulted in dire consequences. It is sad to state that what we are experiencing today are such. We expiate for others’ sins.

From 2007 onwards the sovereign deficit was bridged by raising money from capital market continuously. Those borrowings were reflected in the accounts of the Government. Cabral will not deny that there were times during his tenure of office as the Governor of CBSL when the sovereign debt profile rose to figures as high as 80% of GDP. In such situations it became necessary to resort to other sceptical means of borrowing. Therefore quasi-sovereign institutions such as BOC and NSB which were under 100% control of the government were made use of to fulfil additional borrowing requirements and by-pass the aggravation of the already throttled financial scenario.

In 2012, the fully government owned BOC launched its first US$ bond to raise $ 500 million. The issue was at a yield rate of 6.875%. 

Soon after in 2013 BOC launched its second five year $ 500 million bond (with notes returnable in 2018) at a yield rate of 5.325%.

With lead management by Singapore based UBS, the Bank of Ceylon helped the country to get $ 1 billion in a short space of one year, easing the Forex situation by attracting foreign investors, with its creditability as Sri Lanka’s largest lender and a fully sovereign bank.

Cabral is aware that settlement on account of these becomes due in 2018 and in addition to the escalating coupon rate payments due to exchange fluctuations, the cost increase immensely due to the final payment that has to be made at the current rate of exchange.

Cabral’s concern expressed in the Daily FT on 24/10/2018 very correctly applies to the BOC Forex raised in 2013. To quote his own which he has stated as follows: 

“This shows that the repayment commitment on the loan of US$ 1,000 Million obtained just last Wednesday has now already increased by Rs. 1,100 Million by 22/10/2018.”

If we are to apply the same theory to the Forex Borrowings of BOC in 2013 it needs no elaboration to understand that the liability increases to a huge amount due to the US$ value increasing from Rs. 128 in 2012 and from Rs. 130 in 2013 to Rs. 174 in 2018? Now we can pose the question Cabral has asked back to him.

“Who is taking responsibility for those decisions to add to the Forex Borrowings knowing fully well that the rupee is currently on a downward spiral and further Forex Borrowings is likely to plunge the Sri Lankan economy to ruin?”

The National Savings Bank has over 70% of its deposits base with the government as of September 2012. NSB had a fully guaranteed deposit balance of Rs. 422 billion (this was equal to approximately $ 3.31 billion at the then prevailing exchange rates).

In 2013 NSB was directed by the Treasury to raise $ 1 billion for a 10 year period ostensibly to be shown as an asset outside the government borrowings.

International banks (Citi Bank, Barclays and HSBC) appointed as lead managers of the issue launched roadshows starting from New York, Boston, Los Angeles, London and later Hong Kong and Singapore to promote the sale. In September 2013 NSB concluded a Forex Bond issue of $ 750 million for a five-year tenor with a coupon interest rate of 8.875%!

We recall that this was a period where the UDA had a fund requirement for development projects. It was disclosed that $ 500 million was the fund requirement towards the 1st Phase of the Werasganga Project and another $ 200 million for a Teaching Hospital at Werehera, a project coming under the government controlled Sir John Kotelawala Defense University.

Again through Forex Bonds the NSB raised a sum of $ 250 million under a directive given by the Treasury in 2014 with the HSBC to facilitate as the lead bank.

The identified purpose was that these long term bond issue through the NSB became necessary to finance the infra-structure projects of the government as well as to maintain cash flows and other general corporate purposes in addition to the $ 750 million raised earlier.

The Chairman of the NSB Sunil Sirisena had to quit the Bank for not agreeing to carry out per-se the orders given in this regard by the Treasury Secretary. He was replaced with a lady serving earlier at the BOC who was apparently more amenable to the directives from the Treasury.

Finally the issue was concluded with the Citi Bank acting as the joint runner and the joint lead bank to this issue at a yield rate of 5.15%. The CBSL absorbed the exchange rate risks thus relieving the NSB from the obvious burden falling upon the Bank due to spiralling exchange rate risks! Although such manoeuvres helped to propagate a different picture in actual fact someone had to bear the burden. The CBSL through biannual payments made to the NSB absorbed the risk.

If we are to apply the Cabral Hypothesis as enunciated in his Daily FT article quoted above the picture will be something like what is shown below: 

Assume that the total value of the Forex Bond issue is $ 1 billion. In 2014 – Value of these Bonds in Sri Lanka Rupees is 130 billion when we apply the US$/SLRs Rate of Rs. 130 per US$ prevailed then.

Today the US$ is equivalent to SLRs. 174 the settlement of the notes become due only in 2019. We will not know the Dollar value then. But as at today according to the current exchange rate the SLRs. value of the Bond would be 174 billion. The difference between the two values= 174-130 billions=44 Billion Rs.? Whose responsibility is this according to Cabral Hypothesis? 

We have to understand that these settlements are becoming due in 2018 and 2019. The amounts for settlement will be extremely high due to the rupee depreciation. The current Governor who had to be brought in to replace his fugitive turned predecessor has to bear the brunt, amidst the unfair criticisms by the very people responsible for these precipitations. It is true that most people are having short memories and the gullible are easily deceived. But the irony is that we are made to witness how people make a jest of their own crime.

Unfortunately for us, we do not see the persons in higher echelons acting with a proper understanding of the affairs adding to the confusion by moving forward without a clear vision. All we can do is to hope for the best and to expect sanity to prevail.

T. Rusiripala