Sri Lanka Policy Planning Ministry explains controversial bond auction; mentions probe

COLOMBO (EconomyNext) – Sri Lanka’s Policy Planning Ministry has issued a statement which appeared to defend a controversial bond auction but also said "alleged malpractices which are taking place at the Public Debt Department during bond auctions and private placements," would be investigated.

Past irregularities would also be probed, the statement said.

The bond auction where 10 billion rupees of bids were accepted after offering only one billion, committed the government to paying high interest rates for 30-years and left markets frozen until the next gilt sale.

At the bond auction so-called ‘dummy bids’ made by dealers were also hit, which would require an urgent overhaul of the entire auction process to avoid future debacles.

The statement made no mention of alleged insider dealing shortly before the auction and before a floor liquidity window of the Central Bank was closed.

The full statement is reproduced below:-

Statement to the Media on Treasury Bond Issue in March 2015

At a meeting held on 26 February 2015 to ascertain the Government expenditure projections attended by the Minister of Finance, Minister of Highways, Investment Promotion and Higher Education, Secretary to the Treasury and the Governor of the Central Bank of Sri Lanka, it was decided that the Government needs additional funding of approx. Rs. 15 Billion on an urgent basis to fund the recommencement of Highways and road construction projects.

The previous regime had not settled money owing to contractors and had not paid for lands acquired for road projects. The outstanding amount to be paid for land acquisition alone is Rs. 44 Billion.

To complete the balance road construction work the Government needed Rs. 12 Billion as counterpart funds. Most of the loan agreements for these projects have already been signed. Although the Government will be renegotiating prices, it will continue with these projects. The Government’s immediate needs for cash to make payments for the bills in hand and to complete incomplete projects were to be met through the Treasury Bond issues in March 2015.

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The latest bond issue was opened on 27th Feb. 2015. The amount offered was Rs. 1 Billion. Thirty six offers were received amounting to Rs. 20 billion in bids. This enabled the Governor of the Central Bank of Sri Lanka to accept Rs. 10 Billion in accordance with the above decision.

Around September 2014, when it became clear that the previous Government would hold Presidential Elections in early 2015, the then management of the Central Bank of Sri Lanka decided to reduce interest rates and yields on Sri Lanka Government bonds. As a consequence, the yield on the 10 year Sri Lanka Government bond declined from 9.23% in July 2014 to 7.88% in January 2015.

Similarly, the yield on the Sri Lanka Government 30 year bond fell from 11.75% in May 2014 to 11.73% in February, 2015.

The foreign exchange reserves of Sri Lanka have been falling sequentially since interest rates were lowered in September 2014. From a level of USD 9.2 billion from June 2014 they have come down to USD 7 billion in February, 2015. As a result, the exchange rate of the Sri Lanka rupee which has been under pressure depreciated by 1.2% in January 2015.

The acceptance of Rs. 10 billion worth of bonds has also resulted in raising the interest rate on the 30 year bond to 11.5% which is where it stood in June 2014 before interest rates were reduced. Furthermore, the Central Bank of Sri Lanka has also scrapped the 3 day rule restriction that allowed Banks to park their funds in the Central Bank at the 6.5% base rate on 3 days a month and get 5% in all other days, a practice implemented in September 2014.

The Government also decided that as far as possible all bonds should be through public auction. Private placement at pre agreed rates only helped favoured investors.

It’s a well-known fact that during the last decade the intersection of finance and business was controlled by a few people with nexus to the Rajapaksa regime. They had access to vital information on transactions, which they used to earn undue profits. There were pre-arranged transactions with state owned institutions instead of public auctions open to stock brokers and large investors. Many stakeholders were adversely affected due to manipulations in the stock market. Two Chairpersons of the SEC lost their jobs trying to enforce the existing regulations. The Government is inquiring into these prior malpractices and will also investigate the alleged malpractices which are taking place at the Public Debt Department during bond auctions and private placements.

Finally, the above change in policy and procedures relating to setting of interest rates was done in good faith and will result in several benefits to the Government and economy of Sri Lanka such as;

(a) the maintenance of a stable currency
(b) the maintenance of a clear and stable monetary policy conforming to international standards
(c) creating a liquid yield curve to enable the market to price risk.
(d) the transparent conduct in the sale of Government securities to the markets without pandering to vested interests
(e) the adoption of an appropriate monetary policy stance keeping with the current state of the finances of the Government of Sri Lanka; and
(f) ensuring sufficient funding for the Government in the next 6 months which will ensure no interruption to the implementation of policies announced in the budget and the 100 day programme.

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