Sri Lanka IMF report spotlight on controversial bond deal

ECONOMYNEXT – An International Monetary Fund staff report highlighted a controversial bond auction in March 2016, where the Central Bank of Sri Lanka (CBSL) sold large volumes of long tenor bonds, after offering small volumes.

"The government bond market also became volatile in late March, as the CBSL initially announced issuance of Rs 40 billion in Treasury bonds, but instead issued bonds of Rs 80 billion at a higher rate than that prevailing in the secondary market," the IMF staff report said.

Though the central bank and Governor Arjuna Mahendran has come under fire for over several auctions for pushing up rates and over-issuing long tenor bonds when the budget deficit was suddenly expanded, the March bond sale stood out as an egregious example.

In 2015, the most prominent case occurred in February where a primary dealer owned by Governor Mahendran’s son-in-law bought most of the long tenor bonds.

There were also concerns over the Employees Provident Fund apparently missing bids at primary auctions and then buying bonds in the secondary market at high prices from dealers who bought bonds low prices from the auction.

On June 02, the governing board of the central bank issued a statement saying ‘international best practices’ would be examined and the EPF would be asked to actively buy bonds bond auctions and bond auctions would be transparent.

Analysts had warned that members of the Monetary Board may be held responsible in future legal action if an investigation is held to uncovers fraud.

Mahendran has denied wrongdoing but there is rising pressure from civil society activists and constituent parties of the ruling coalition and opposition to his re-appointment when his term ends this month. The central bank has suppressed a previous economic report by the IMF. (Colombo/June17/2016)

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