Former CB Governor Cabraal refutes

government allegations; wants public TV

debate with Premier Ranil

May 24th, 2015

While categorically rejecting the recent media reports that Rs. 2,700 billion has
been misappropriated in the years 2012, 2013 and 2014 through private
Treasury Bond auctions, former Governor of the Central Bank of Sri Lanka, Ajith
Nivard Cabraal says that it defies all logic and common sense to claim that the
entirety of the Treasury Bond issues made by the Government from 2012 to 2014,
are to be construed as losses, on the erroneous assumption of Prime Minister
Ranil Wickremesinghe that a part of such issues have been through private
placements.
Full statement reproduced below:
At the outset, I wish to a state that I have held the office of the Governor of
the Central Bank for a period of around 3100 days, and during that period,

Sri Lankas GDP which was just over USD 24 billion in 2005, had been
carefully nurtured to grow to a robust USD 75 billion by 2014, with the per
capita income rising to about USD 3,700. Further, every macro-economic
fundamental of our country had been improved significantly. Unfortunately,
because of this unprecedented transformation, there have been some
politically motivated persons who have been adversely affected. Therefore
some of them have been on a hate-driven, revengeful attack against me, in
order to tarnish my reputation, and it is clear that these hurtful attacks are
now escalating, in view of the present Governors conduct coming under
close scrutiny.
One such recent attack is the shockingly false statement as reported in
various media, that Rs. 2,700 billion has been misappropriated in the
years 2012, 2013 and 2014 through private Treasury Bond auctions which
have allegedly been conducted by Tender Boards chaired by me. It is also
claimed that I have authorized these illegal transactions, for the benefit of
various cronies.
I categorically reject such preposterous allegations, and must also state
that it defies all logic and common sense to claim that the entirety of the
Treasury Bond issues made by the Government from 2012 to 2014, are to
be construed as losses, on the erroneous assumption of the Prime
Minister that a part of such issues have been through private placements.
I also observe that an attempt has been made to twist the concept of Direct
Placements to Primary Dealers after conducting an auction, as a sinister
and/or secretive process, and to suggest that such placements were
personally handled by me to grant favours to selected persons.
In this regard, I had initially decided to ignore these wild and false
allegations, but since these are now being leveled with gay abandon,
obviously to cover-up the major controversy of the 27th February 2015
Treasury Bond issue, I believe it is now necessary to provide a response. As
a start, it may be useful to set out a short response to the Prime Ministers
statement made in Parliament on 17th March 2015, regarding the
controversial bond issue of 27th February 2015.
In that statement, he first raised the issue of private placements being
done by the Central Bank, with the innuendo that it is a corrupt practice. In
that context, it must be stated that in many developed and emerging
economies, the practice of Treasury Bill and Bond auctions and follow-up
with direct issuance of bonds to investors, is being followed. In Sri Lanka
too, such practice has been followed for several decades to reduce the
borrowing cost to the issuer, i.e., the Government. The benefit is derived
since the determination of yields of such direct placements have always
been on the basis of the LOWER of the latest primary market weighted
average yield rate, and the prevailing secondary market yield rates.

Hence, it is a practice that is transparent, since the yield rate is established

through a bidding process, and is known to all. Although the Prime Minister
failed to maintain this fact his statement, it must also be said that it is not
possible to misguide the Treasury Bills and Bonds market, in such
circumstances, as all this information is available to all market players. In
fact, such fact was discovered by the current administration during the
recent controversy which erupted no sooner the 30-year T-bond of 27th
February 2015 was announced, because the market quickly picked up the
irregular nature of the transaction, which was beneficial only to a handful
number of people.
In the Prime Ministers statement, he had also stated as follows: In just one
instance in 2013, Rs.16 billion worth of 5 year bonds were sold through
auction at a yield of 10.9% and thereafter Rs.76 billion of the same bond
were sold through private placements at a HIGHER yield of 11.42% .
However, the facts in this connection as may be noted from the publicly
available data are as follows:
(a) As per the auction results published in the Central Bank Press Release
dated 10.01.2013, the Rs.16 billion 5-year T-bond issuance referred to
above was for a 5 years and 3 months tenure, and was made at a yield of
10.90%.
(b) Thereafter, a FURTHER primary auction of T-bonds was held on
27.03.2013 for the same tenure, i.e. 5 years and 3 months for a different
bond series, and the primary auction yield rate at that auction was 11.45%.
That auction results were published in the Central Bank Press release dated
27.03.2013.
(c) The direct placements done subsequent to the T-bond auction held on
27.03.2013 were at a lower yield of 11.42% which was lower than the
primary auction yield rate of 11.45% referred to in (b) above.
Hence, the practice as followed by the Central Bank which has been
existing for a considerable period of time had resulted in LOWERING the
borrowing cost to the Government, unlike in the case of the 27th February
2015 Treasury Bond, where the Government had to incur a huge
ADDITIONAL cost. In that background, it is clear that the Prime Minister had
misdirected himself, which led to him making an erroneous statement in
Parliament.
In contrast however, the background of the 30-year bond transaction of
27th February 2015, is different, as summarized below:
Date Tenure & amount offered Amount accepted
(Rs.m) Yield accepted Yield at the latest previous placement
27.02.2015 30 Year Rs. 1,000 10,058 11.73 8.85

In the Prime Ministers statement, he has been quick to compare the above
yield rate of 11.73% of the 30-year bond issued, with the yield rate of
11.75% of the 30 year bond issue made in June 2014.
However, he conveniently ignores any reference to the most vital factor
which is the substantial reduction in market yield rates after June 2014 in
the case of the 30-year T-bonds, leading to the rate being only 8.85% just
prior the 30 year bond auction held on 27th February 2015. In fact, there
have been several direct placements made during the period from June
2014 to 27 February 2015, at gradually REDUCING yields in accordance
with the principles and practices followed in making direct placements, with
the latest such direct placement having been made at 8.85% just weeks
before the 27th February 2015 auction. Hence, the Prime Ministers
statement seems to be cleverly formulated to conceal the true loss to the
Government, which was the payment of nearly 2.98% 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.
The Prime Ministers statement also referred to several previous instances
of the Central Bank accepting much higher volumes of bids than what were
advertised. He makes particular reference to the Treasury Bill issue on 14
February 2014, where Rs.1 billion worth of Treasury Bills were offered, and
over Rs.11 billion were eventually sold. Reference is also made to the
Treasury Bill issue on 14 November 2014, where Rs.2 billion worth of
Treasury Bills were offered, and over Rs.13.5 billion were sold. In this
connection, it is useful to examine the details of such issuances, which are
summarized below:
Date Tenure & amount offered Amount accepted (Rs. m) Yield at the
previous latest auction Yield accepted at the current auction
13.02.2014 182 Day Rs. 1,000 m 11,067 7.00 6.92
14.11.2014 182 Day Rs. 2,000 m 13,513 5.84 5.84
As can be seen, the above amounts were accepted at the SAME or LOWER
yield rates, and NOT at HIGHER yield rates, as has happened in the instance
of the 27th February 2015 Treasury Bond auction, which the Prime Minister
seems to be very keen to justify as being without blemish. Another reason
to accept a higher quantum at that time may have probably been to avoid a
significant decline in the yield rates, which would have disturbed the
smooth functioning of the government securities market.
The above observations are made by me from publicly available data, but
the Public Debt Department should be able to clarify these matters further,
it they are requested to do so. At the same time, may I also state that I
have not yet been able to study the Report of the Lawyers appointed by the
Prime Minister that was tabled in Parliament a few days ago, and hence I
am unable to comment on its contents. However I would be able to do so

after I have had the opportunity to review same, in a few days time.
It must also be stated that the proper and smooth functioning of the
government securities market is very important to an economy since it sets
the benchmark, risk-free yield rates for all other markets. In fact, it sets the
guidance for the pricing of the entire range of financial instruments, from
the over-night bank deposit rates to 10-year prime corporate debt rates to
even 20 year housing loan facilities to ordinary citizens! Accordingly, if the
risk-free, benchmark yield curve is artificially corrupted or manipulated, or
does not reflect the underlying macro fundamentals including low inflation,
it will create a huge asymmetry in the functioning of the financial market.
There will also be a crowding-out effect in the government budget financing
while the loanable funds available for the private sector would be drained.
In such circumstances, the private sector, which is expected to make at
least an annual investment of around 25% of the GDP to secure an annual
real GDP growth of around 7.0%, would not be able to do so. Such a
situation would eventually lead to a negative impact on employment and
other macro-economic variables as well.
Let me also state that during my period in office, I have ensured that the
Central Bank diligently follows the laws of the country and the rules and
regulations established by the Monetary Board, and have at all times, acted
in the national interest of Sri Lanka and defended the integrity and wellbeing of our economy to the maximum. Notwithstanding such efforts,
during my term of office, several political and other elements instituted
legal actions against me and the Central Bank on various issues, in the
Supreme Court of Sri Lanka, including the Ceylon Petroleum Corporations
oil hedging transactions, EPFs investments in the Stock Market and the
Central Banks investments in Greek Bonds.
In all these actions, the Supreme Court did not cite a single instance which
even remotely suggested that I have done any wrong. Further, during my
term of office at the Central Bank, well laid-out and documented procedures
were followed in an environment of high quality internal controls, including
due process and proper authorization. I am therefore confident that in all
policy advice activities, payments and investments, the applicable
authorizations and procedures have been properly adhered to. The Central
Banks actions have also been reviewed by the Central Banks own Internal
Audit function and Compliance Mechanism, as well as by the Auditor
General and the Central Banks IFRS Auditors, Ernst and Young. In addition,
Parliamentary oversight has been exercised by way of Committee on Public
Enterprises (COPE) examinations and Committee on Public Accounts (COPA)
reviews. The IMF has also conducted its own Safeguard Missions to assess
the integrity of the Central Bank systems and operations during my period
in office. I am proud to say that, through all such stringent reviews, there
has not been single instance of misconduct or wrong-doing that has been

cited by any of those authorities during the long period of 3,100 days, in
relation to my conduct.
I can also boldly and confidently state, that in my professional career that
spans 33 years in the private sector and 9 years in the public sector, my
superiors, peers, colleagues and staff who have worked with me, know
about my capacity for hard and diligent work, and the high standards of
integrity, impartiality, good governance and professionalism that I have
followed. In addition, the multi-lateral financial institutions, including the
IMF, WB and the ADB, the large number of international investors who have
so far invested over USD 6 billion in Sri Lankan financial instruments, and
the global investment banks who have had extensive dealings with the
Government and the Central Bank over the past eight years, will also
confirm the highest standards of integrity, transparency and good
governance that had been followed during my stewardship at the Central
Bank.
Notwithstanding the above, in the light of the new allegations made by the
Prime Minister and certain others in government, I would be happy if
Parliament, as the pillar of government that is responsible for the public
finances of our country, were to immediately establish a Parliamentary
Select Committee to independently review the work done during my tenure
of office of around 3100 days as Governor. If that is done, I would also
welcome the opportunity to provide details of the massive savings that
have been effected in the Central Bank, the economy and the country,
during my term of office.
In a similar manner, I would like to invite the new Governor and those who
are making these regular allegations against me, to also boldly subject
themselves to a similar review of the first 100 days of their stewardship,
particularly by way of an investigation by a Parliamentary Select
Committee, into the 30 year Treasury Bond issue of 27th February 2015,
and its devastating aftermath, as well as to examinations by COPE, COPA,
and IMF Safeguard Assessment Teams without any delay and without
obstructing the Oppositions efforts to implement such a process.
As a former Governor, let me also state that it is not at all wise for senior
governmental sources to regularly and recklessly discredit the existing
systems and processes of the Public Debt Department, as well as damage
the credibility of the Central Bank by ridiculing its time-tested and
scientifically established methodologies, in order to score cheap political
points. When that is done, the Government runs the risk of such statements
sending shock-waves across the global investor community which
unfortunately may lead to disastrous consequences if foreign investments
are pulled out from the country suddenly.
Since of late, there has been a growing feeling in the country that the Prime

Minister has been desperately attempting to justify the processes

surrounding the Treasury bond issue of 27th February 2015, although he
has been quick to pursue with vigour, even the slightest suggestion of
wrong-doing of the previous regime. 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.
However, in actual fact, several rules and practices laid down by the
Monetary Board seem to have been breached in the case of the 27th
February 2015 bond issue, while the losses arising as a consequence of this
issue are mounting daily to astronomical levels, with the additional interest
cost to the government now said to be exceeding Rs. 47,000 million as per
knowledgeable analysts.
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.
Posted by Thavam