COLOMBO (EconomyNext) – Sri Lanka’s former Central Bank Governor Nivard Cabraal has denied claims by Prime Minister Ranil Wickremasinghe that gilts were directly placed at higher than auction rates in the past and challenged him to a television debate.
Sri Lanka’s Prime Minister has pointed fingers at private placements made during the last regime as the new administration has come under fire over a 30-year bond sale where rates soared and brought the entire gilt market to a standstill for nearly two days.
The sales volume was upped 10 times and half the volume was given to a company connected to the son-in-law of Central Bank Governor Arjuna Mahendran.
"My attention is drawn to several recent accusations and innuendo by certain persons, including the Prime Minister, alleging various wrong-doings and misdemeanors on my part, during the period I served as the Governor of the Central Bank," Cabraal said in a statement.
"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…"
Cabraal says private placements were done during his time either below the most recent weighted average auction rate or the secondary market rate.
He referred to a statement attributed the Prime Minister, where he was quoted as saying that in 2013, 16 billion rupees of 5-year bonds were auctioned at 10.9 percent and 76 billion rupees of bonds were placed privately at 11.42 percent.
Cabraal says 5-year 3-month bonds were auctioned for 10.9 percent on 10.01.2013 but on 27.03.2015 says 5-year, 3-month bonds of a different series were auctioned at 11.45 percent.
Private placements were then done at 11.42 percent, which was below the auction rate.
In the case of the 30-year bond also Cabraal says the last auction in June 2014 was at 11.75 percent, but private placements were done at lower rates later. The most recent placement before the controversial bond auction at 11.73 percent on in February 2015 was done at 8.85 percent, he said.
"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 percent 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," Cabraal alleged.
Referring to an instance where Treasury bills (Treasury bills are short term paper of less than one year) when a billion rupees was offered and 10 taken, Cabraal says the yield was the same or below that of the last auction.
Analysts however criticize placements on several grounds, primarily that it allows the Central Bank to manipulate interest rates down and generate balance of payments crises and high inflation by delaying the establishment of a market clearing interest rate
It may also result in below market rates being paid to institutions like the Employees Provident Fund, in addition to creating general financial repression in the country. There have also been strong criticism of EPF’s equity investments in the past, involving the same financial group Perpertual, that was involved in the 30-year bond scandal.
Cabraal claimed that there is a growing perception that the Prime Minister has been "desperately attempting to justify" the 30-year bond auction, although the wrong-doings of the last regime are persued.
"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," Cabraal said.
Cabraal said several rules have been violated, though they were not specified.
"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."