Sri Lanka ex-CB Governor removed lower policy rate irregularly on bond auction day: official

ECONOMYNEXT – Sri Lanka’s ex-Central Bank Governor Arjuna Mahendran had ordered a lower policy interest rate to be scrapped on the day of a controversial bond auction in 2015 without first getting the approval of the rate setting monetary board, an official said.

Retired Assistant Governor C Karunathilake said on February 27 that governor Mahendran had told members of the market operations committee of the Central Bank’s Domestic Operations Department to discontinue the payment of a 5.0 percent policy rate for excess cash.

Karunathilake was giving evidence at a presidential commission of inquiry going into so-called ‘bond scams’ in 2015 and 2016 where Perpetual Treasuries, a firm connected to governor Mahendran’s son-in-law is alleged to have benefitted.

Karunathilake said every day, at around 9.00am, the market operations committee sat to decide on the Central Bank’s interventions in interbank money and forex markets.

At the time, the Central Bank was injecting cash at 8.0 percent, and withdrawing excess cash at 6.5 percent and 5.0 percent.

On February 27, Karunathilake came to the morning meeting a few minutes late and he was told that governor Mahendran had told the committee to withdraw excess liquidity and remove the 5.0 percent second floor rate of the policy rate corridor.

But the market operations committee had no powers to implement such instructions, he said.

On February 27, Deputy Governor (Nandalal) Weerasinghe chaired the market operations meeting and no decision was made to implement the governor’s instructions, he said. The committee did not have powers to do so, he said.

Karunathilake said he did not chair the meeting as he felt he did not have the necessary experience in domestic operations, which was put under his charge as part of changes at the Bentral Bank made by Mahendran.

Removing the lower policy rate was a monetary policy decision that should have been made at the monetary board, Karunathilake said. The most recent meeting had been held on February 23, 2015, where no such decision had been made.





The usual process was for a monetary policy committee of technical staff to make a recommendation to the board, who would consider and make a decision. Only then can the Domestic Operations Department implemented it, he said.

Karunathilake said he was not aware that the committee had recommended the removal of the lower floor rate. He believed the recommendation had been made to maintain rates, which had been communicated to the market in a press release.

The director of domestic operations (P) Rodrigo had later prepared a document based on the governor’s instructions and initialled it.

The document was sent via the Deputy Governor to the Governor for signature and communicated the market in the afternoon, Karunathilake said. (Colombo/Apr26/2017)

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