Sri Lanka central bank bought property in Brazil, New York; forensic audit due: FinMin

LIQUIDITY: US$1000 note issued by the Second Bank of the United States. The notes were not irredeemable paper money like now. Source: Wikimedia

ECONOMYNEXT – Sri Lanka’s central bank has bought property in Brazil and New York and results of a forensic audit on questionable securities deals are due in two months, Finance Minister Mangala Samaraweera said.

The central bank in addition to printing money and busting the currency from 4.70 to 182 to the US dollar since it was set up in 1950, in the worst depreciation among South Asian monetary authorities, was also caught in what is now labeled the biggest securities scam in 2015 and 2016.

Conflicts and Corruption

The monetary authority, which is also charged with selling state debt in a conflict of interest, is alleged to have rigged bond auctions to favour a securities dealership controlled by then central bank Governor Arjuna Mahendran’s son-in-law Arjun Aloysius.

Sri Lanka is now seeking help from Singapore to arrest Mahendran.

The same monetary authority in another conflict of interest not only sells bonds but also invests them in a pension fund of private sector workers called the Employees Provident Fund.

In the scam, the central bankers who were managing the fund is alleged to have bought the bonds at high prices, after avoiding placing bids in the auction in a bid to drive up auction yields.

In that year central bank also issued larger volumes of long tenor bonds, unlike in other periods, running up to 30 years at high prices, despite a tax hikes and a fiscal consolidation plan being on the cards. The capital gains made from dumping bonds on the EPF increases with the tenor.

However the property in Brazil and New York had been bought before 2015.

“These are the acts of the former Finance Minister who is now pointing fingers at us,” Finance Minister Mangala Samaraweera said, responding to a statement made by ex-President Mahinda Rajapaksa.

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In 2014 the bank had bought property in Brazil for 122 million rupees. A condominium bought in New York had been valued at 7 million US dollars in the central bank accounts.

There have been questions raised about earlier bond sales as well as central bank investments of EPF money in stocks.

It has been alleged that the same dealers who began the equity scams continued the bond scams as well.

“The forensic audits will come in a couple of months and reveal all,” Samaraweera said.

It is not clear how the agency bought the condominium or property in Brazil, what kind of procurement process was used. Nobody has been punished for the transactions, but under its governing law the agency has sweeping powers to engage in various transactions.

The Central Bank’s current Governor, Indrajit Coomaraswamy, a highly respected public servant, had done much to clean up its image.

Monetary Instability

But the collapsed further to new records, under a so-called flexible exchange rates backed by discretionary policy and an output shock and a revenue collapse.

The Reserve Bank of India – an agency which still taxes gold to fix the balance of payments – also started at 4.70 to the US dollar at independence to which the Ceylon Rupee was hard-pegged. The RBI has has collapsed its own currency to 71 to the US dollar.

Pakistan’s Central Bank has collapsed its currency to 160 and is closely following Sri Lanka’s central bank, dragging the country to the International Monetary Fund frequently.

Bhutan and Nepal have strong pegs, but unfortunately linked to the Indian rupee.

Bangladesh’s central bank had collapsed its currency to 81 to the US dollar.

But it had now had over 8 years of stability at around 81 to the US dollar giving a strong foundation for growth, compared to crises every two to three years in Sri Lanka.

The Mauritius rupee had fallen around around 36 to the US dollar after its currency board was broken, but the agency does not practice very fancy monetary policy.

Maldives which best monetary authority with the strongest currency in South Asia, has sen the rufiyaa fall to 15 to the dollar after it started to engage in more active open market operations, critics say.

In 2018, as monetary instability worsened, the central bank itself made the Treasury control, international trade, directly hitting the current administration’s free trade agenda.

After the collapse of the Bretton Woods Sri Lanka’s entire economy was closed with draconian exchange controls from the central bank as well as trade controls.

Top economist Razeen Sally, has called the setting up a money printing central bank, with sweeping discretionary powers, and ending a rule-based currency board, an early ‘birth defect’ of independent Sri Lanka.

You may also read:

Breaking currency board was early birth defect of independent Sri Lanka: Sally

There have been calls to reign in the discretionary powers of the central bank so that it cannot depreciate the currency at will, and generate instability through various re-incarnations of a soft-pegged exchange rate regime.

Restraint

Monetary history shows that central banks, not just in Sri Lanka but elsewhere, tend to trigger financial bubbles and monetary instability as well as corruption like in Sri Lanka.

Sri Lanka’s central bank also has bureaucratic discretion to generate massive liquidity shocks.

The enormous resources place under the control of the central bank and its sweeping powers to print money and weak accountability has allowed the agency to act with impunity in Sri Lanka, generating fraud controversies critics say.

The United States once abolished a central bank amid corruption charges under President Andrew Jackson.

“You are a den of vipers and thieves,” Jackson was reputed to have told a delegation who came to visit him and ask him not to close the central bank (The Second Bank of the United States), though the exact words are disputed.

“I intend to rout you out, and by the eternal God, I will rout you out.”

A greater curse

A contemporary publication at the time, Niles Register reported that President Jackson had asked the bank to contract its note issue (withdraw 10 million cheques) through a sale of reserves, or face instant closure.

“Let the directors of the bank pursue their business on principles of Christian benevolence, and all will be well,” President Jackson, a Christian, was quoted as saying in the Niles Weekly Register of March 01, 1834.

“Let them wind up the business of the bank, without attempting to break down the government, and force a re charter, and it will die with the blessings of thousands; otherwise, it will have the curses of millions.

“I have read the scriptures, gentlemen, and I find that when Moses ascended the mountain, the children of Israel rebelled, and made a golden calf and worshipped it, and it brought a curse upon them.

“This bank will be a greater curse.

“I have no hostility to the bank; I am willing it should expire in peace; but if it does persist in its war with the government, I have a measure in contemplation which will destroy it at once, and which I am resolved to apply, be the consequences to individuals what they may.

“The bank has in circulation ten millions of checks, which I have no doubt are illegal. These checks must then be returned upon the bank, and will drain her of the specie she is hoarding.”

The bank closed two years later as its charter expired.

The US did not have central bank until 1916. Barely a decade after its creation the Federal Reserve fired such a massive boom (The Roaring 20s bubble) that its collapse around 1929, generated the Great Depression.

There have been calls to make Sri Lanka’s central bank follow consistent and non-contradictory policy which will end permanent depreciation, or have a genuine floating rate which will make inflation targeting possible and also end permanent depreciation and instability allowing people engage in economic activity in peace.

However efforts are now underway to perpetuate a discretionary ‘flexible exchange rate’ and also avoid genuine inflation targeting with a floating exchange rate, and instead continue wih a targeting a domestic anchor, as well as pegging to build a ‘reserve buffer’. (Colombo/Oct05/2019)

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