Thursday September 20, 2018

Sri Lanka had cheaper options to fund sudden cash need than 30-year bonds: Official

Apr 27, 2017 08:57 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - Sri Lanka did not have to issue a large volume of 30-year bonds in February 2015, in a controversial auction to meet a sudden cash need, but could have overdrawn the Bank of Ceylon, which was already flushed with excess cash, an official told.

Former Deputy Governor of the Central Bank W A Wijewardene told a commission of inquiry that selling large volumes of long-term bonds at once, for which there was less appetite, was ill-advised.

The commission went into so-called 'bondscams' during 2015 and 2016, under the watch of then Central Bank governor Arjuna Mahendran.

The auctions were alleged to have been rigged to benefit Perpetual Treasuries, which bought bonds at low prices and sold them later to the Employees Provident Fund for high prices.

The State attorney's questioned Wijewardene if he knew whether there was in fact an actual extra cash need at the Treasury ahead of the controversial auction on February 27, where one billion rupees of 30-year bonds were advertised for auction, but 10 billion was sold.

He said he knew only what had been told to him by others.

Wijewardene said, if there was a need, the usual practice was for the Treasury operations department of the finance ministry to convey it to the Department of Public Debt at the Central Bank.

A very urgent need would be conveyed by telephone and followed up in writing.

Witnesses had said earlier Governor Mahendran had insisted that up to 20 billion in bids be accepted at the auction due to a sudden cash need of the government, but Central Bank officials had resisted. Eventually, 10 billion rupees of 10-year bonds had been sold.

Perpetual Treasuries became the largest buyer, with funding from the Bank of Ceylon.

Justice Prasanna Jayawardene questioned whether the Bank of Ceylon already had excess cash of over 17 billion rupees, which could have been used.

Some of the excess cash had been given by the Bank of Ceylon to bid for bonds on behalf of Perpetual Treasuries, according to a report by three lawyers headed by Gamini Pitipana, the court was told.

If the Bank of Ceylon was overdrawn, the loan could have been settled in a later bond auction by the issue of a shorter tenor, and a bond at a lower rate, Wijewardene said. If shorter-tenor bonds were sold for 7.75 percent, the savings for a year were about 4.75 percent.

That worked out to a loss of around 10 billion rupees for the government over 30 years, Wijewardene said.

Wijewardene said issuing long-term bonds was a good strategy to lengthen the tenor and build up a yield curve, but large volumes could not be sold at once, because appetite was limited.

Only insurance companies and pension funds bought them, and the original plan to sell one billion rupees was a correct one, he said.

The sudden hike in the 30-year bond yield also pushed up interest rates of other maturities, resulting it the raising of the entire yield curve upwards, he said. (Colombo/Apr27/2017)


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